Differences between fixed and adjustable loans

With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts for your fixed-rate loan will increase very little.

At the beginning of a a fixed-rate mortgage loan, the majority your payment goes toward interest. The amount applied to your principal amount goes up slowly every month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Forum Mortgage Bancorp at (773) 774-9040 Ext 121 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. In addition, almost all ARMs have a "lifetime cap" — your rate won't exceed the capped percentage.

ARMs most often feature their lowest, most attractive rates toward the start of the loan. They provide the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the loan adjusts.

You might choose an ARM to take advantage of a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (773) 774-9040 Ext 121. It's our job to answer these questions and many others, so we're happy to help!

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