Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The amount allocated to your principal (the amount you borrowed) will go up, however, your interest payment will go down accordingly. The property taxes and homeowners insurance will go up over time, but for the most part, payments on these types of loans vary little.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay , more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. 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 me at (901) 240-0758 to learn more.

There are many types of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by an outside 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 programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't adjust more than 2% 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 payment can increase in one period. In addition, almost all ARM programs have a "lifetime cap" — the rate can't ever exceed the capped percentage.

ARMs most often feature their lowest rates at the beginning. They provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who will move before the initial lock expires.

You might choose an ARM to take advantage of a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values go down and borrowers cannot sell or refinance their loan.

Have questions about mortgage loans? Call us at (901) 240-0758 . It's my job to answer these questions and many others, so I'm happy to help!