Fixed versus adjustable rate loans

With a fixed-rate loan, your monthly payment stays the same for the life of your mortgage. The portion of the payment allocated to principal (the actual loan amount) will go up, but the amount you pay in interest will decrease accordingly. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans vary little.

During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage toward principal. The amount paid toward principal increases up slowly each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Omni Mortgage Company, Inc. at 603-893-6616 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are generally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, which means they won't go up above a certain amount in a given period of time. 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 the payment can go up in a given period. Additionally, the great majority of ARM programs feature a "lifetime cap" — the rate will never exceed the cap amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set 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. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs most benefit people who plan to move before the initial lock expires.

You might choose an ARM to get a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 603-893-6616. We answer questions about different types of loans every day.