Fixed versus adjustable rate loans

With a fixed-rate loan, your payment doesn't change for the entire duration of your loan. The amount that goes for principal (the loan amount) will go up, however, your interest payment will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans change little over the life of the loan.

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

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Metro Mortgage at 8002526633 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most 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. Sometimes an ARM features a "payment cap" that ensures that your payment can't go above a fixed amount over the course of a given year. In addition, almost all ARMs feature a "lifetime cap" — your interest rate can never go over the cap percentage.

ARMs most often have their lowest rates at the start. They provide the lower interest 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. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on staying in the house for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell or refinance at the lower property value.