Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment stays the same for the entire duration of your loan. 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 monthly payments on your fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount paid toward your principal amount goes up gradually each month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Affordable Mortgage Financing, LLC. at (608) 372-9222 to learn more.

There are many different kinds 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 one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, so they won't increase over a specific amount in a given period. Some ARMs won't adjust 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 directly, caps the amount that the monthly payment can increase in one period. Additionally, almost all adjustable programs feature a "lifetime cap" — this means that the rate won't go over the capped amount.

ARMs most often have the lowest, most attractive rates toward the beginning of the loan. They provide that interest rate from a month to 10 years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit people who plan to move before the loan adjusts.

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