Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment amount over the life of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage toward principal. As you pay , more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this lower 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'll be glad to help you lock in a fixed-rate at a favorable rate. Call Amity Mortgage at (770) 454-9566 for details.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your 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 have their lowest rates at the beginning of the loan. They usually provide that interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are best for borrowers who anticipate moving within three or five years. These types of ARMs are best for people who plan to move before the initial lock expires.

You might choose an ARM to get a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky when property values decrease and borrowers can't sell or refinance.