Fixed versus adjustable rate loans

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With a fixed-rate loan, your monthly payment never changes for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but in general, payments on fixed rate loans vary little.

When you first take out a fixed-rate mortgage loan, the majority your payment is applied to interest. That gradually reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because 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 provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Prosperity Co. dba Prosperity Mortgage Co. at (630) 305-9207 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, which means they can't go up over a specific amount in a given period of time. Some ARMs won't increase 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 rate directly, caps the amount that the payment can increase in one period. Additionally, the great majority of adjustable programs feature a "lifetime cap" — this cap means that the interest rate will never go over the cap amount.

ARMs most often feature the lowest rates at the start of the loan. They usually guarantee the lower rate from a month to ten years. You've likely 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 a number of years (3 or 5), then they adjust. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit borrowers who will move before the loan adjusts.

You might choose an ARM to get a lower initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at (630) 305-9207. We answer questions about different types of loans every day.