Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment over the life of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on your fixed-rate loan will be very stable.

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

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at this low 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 can assist you in locking a fixed-rate at a good rate. 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 every six months, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, which means they won't increase above a specified amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in a given period. In addition, the great majority of adjustable programs feature a "lifetime cap" — the interest rate won't exceed the capped percentage.

ARMs most often feature the lowest, most attractive rates toward the beginning. They usually provide the lower 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 loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers cannot sell or refinance their loan.

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