Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment remains the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments for your fixed-rate mortgage will increase very little.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller percentage toward principal. That gradually reverses itself as the loan ages.

You might 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 wish to lock in at this low 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 can help you lock in a fixed-rate at a favorable rate. Call Superior Mortgage Services, Inc. at 513-474-0899 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature 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 index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment can't go above a fixed amount over the course of a given year. Plus, almost all ARM programs feature a "lifetime cap" — the interest rate can never go over the capped percentage.

ARMs usually start at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are best for people who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who plan to move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 513-474-0899. We answer questions about different types of loans every day.

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