Differences between adjustable and fixed loans

With a fixed-rate loan, your payment never changes for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but generally, payments on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount applied to principal increases up slowly every month.

Borrowers might choose a fixed-rate loan to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call VALoansMN.com at (612) 240-9922 to learn more.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in a given period. Most ARMs also cap your rate over the life of the loan period.

ARMs most often feature the lowest rates at the beginning. They guarantee the lower rate from a month to ten years. 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 loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs benefit people who will move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on staying in the house for any longer than this 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 with a lower property value.

Have questions about mortgage loans? Call us at (612) 240-9922. We answer questions about different types of loans every day.