Differences between adjustable and fixed loans

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A fixed-rate loan features a fixed payment over the life of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly toward interest. This proportion reverses as the loan ages.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Gilligan Financial at 7075458183 to discuss your situation with one of our professionals.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, so they won't increase above a specific amount in a given period. There may be a cap on interest rate increases 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. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs most often feature the lowest rates toward the start of the loan. They guarantee that rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can't sell their home or refinance at the lower property value.

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