Differences between adjustable and fixed rate loans

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A fixed-rate loan features a fixed payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on a fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion reverses as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call VENTURE DEVELOPMENT INC at 952-929-2577 to learn more.

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

Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. 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 directly, caps the amount that your monthly payment can increase in a given period. Additionally, almost all adjustable programs feature a "lifetime cap" — this means that the rate can't ever go over the capped amount.

ARMs most often feature the lowest rates at the beginning. They usually guarantee the lower interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than this introductory low-rate period. ARMs are risky when property values decrease and borrowers are unable to sell or refinance.

Have questions about mortgage loans? Call us at 952-929-2577. It's our job to answer these questions and many others, so we're happy to help!