Differences between fixed and adjustable rate loans

With a fixed-rate loan, your payment never changes for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans vary little.

When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. That reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. 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 Forum Mortgage Bancorp at (773) 774-9040 Ext 121 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.

Most ARM programs feature a cap that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment will not go above a certain amount over the course of a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — this cap means that the rate will never go over the cap percentage.

ARMs most often have their lowest, most attractive rates toward the start. They usually provide the lower rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for people who expect to move in three or five years. These types of ARMs most benefit people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to get a lower initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.

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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