Differences between adjustable and fixed loans

With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Carolina Equity Services, Inc. at (919) 355-1034 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, which means they can't go up over a specified amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment won't increase beyond a fixed amount over the course of a given year. Most ARMs also cap your rate over the life of the loan.

ARMs most often have the lowest rates toward the start. They usually guarantee the lower interest rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the house for any longer than this initial low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell or refinance.