Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of the loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount applied to principal increases up gradually each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater 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 Boardwalk Financial at 562-328-5576 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted every six months, based on various indexes.

Most ARM programs have 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. Sometimes an ARM features a "payment cap" that ensures your payment can't increase beyond a fixed amount over the course of a given year. Additionally, almost all ARM programs feature a "lifetime cap" — this means that the interest rate can't ever exceed the capped percentage.

ARMs most often feature the lowest rates toward the beginning of the loan. They guarantee the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan to remain in the home longer than this initial low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell their home or refinance.