Differences between fixed and adjustable rate loans

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A fixed-rate loan features the same payment for the entire duration of the mortgage. The property taxes and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans vary little.

Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage goes to principal. The amount paid toward your principal amount increases up slowly each month.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Felge International, Inc., Dba -The Mortgage Warehouse - NMLS3185 at (509) 892-9014 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most ARMs are capped, which means they won't increase above a specified amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment can't go above a certain amount in a given year. In addition, the great majority of ARMs feature a "lifetime cap" — this means that your rate won't go over the capped amount.

ARMs most often have their lowest rates toward the beginning. They guarantee that rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit people who will move before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to stay in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down 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 (509) 892-9014. We answer questions about different types of loans every day.