Fixed versus adjustable loans

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A fixed-rate loan features the same payment amount over the life of your loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on fixed rate loans don't increase much.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller percentage toward principal. The amount paid toward principal goes up gradually each month.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call PREMIERE MORTGAGE SERVICES INC. at 978-422-2311 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.

The majority of ARMs feature this cap, so they won't go up over a certain amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees that your payment won't increase beyond a certain amount in a given year. The majority of ARMs also cap your rate over the life of the loan period.

ARMs usually start out at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 978-422-2311. We answer questions about different types of loans every day.