Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment over the life of the mortgage. The property tax and homeowners insurance will go up over time, but generally, payments on these types of loans change little over the life of the loan.

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

You can choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call Forum Mortgage Bancorp at (773) 774-9040 Ext 121 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, which means they can't go up above a certain amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment can't go above a fixed amount over the course of a given year. Most ARMs also cap your rate over the life of the loan period.

ARMs most often have the lowest rates toward the beginning of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at (773) 774-9040 Ext 121. We answer questions about different types of loans every day.

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