Differences between fixed and adjustable loans

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A fixed-rate loan features the same payment over the life of your loan. The property taxes and homeowners insurance will go up over time, but in general, payments on these types of loans don't increase much.

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

You can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate 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 offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Fairfax Mortgage Investments at 703-385-6122 #236 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest for ARMs are determined by 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 programs feature a cap that protects you from sudden monthly payment increases. 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 won't increase beyond a fixed amount over the course of a given year. Plus, the great majority of ARM programs have a "lifetime cap" — the rate can't go over the cap amount.

ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers 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 initial rate expires. ARMs can be risky if property values go down and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 703-385-6122 #236. It's our job to answer these questions and many others, so we're happy to help!