Differences between adjustable and fixed rate loans

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With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The portion allocated to your principal (the loan amount) increases, however, your interest payment will go down accordingly. The property taxes and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans don't increase much.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage toward principal. That reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Manhattan Financials at 718-766-9112 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on 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.

The majority of Adjustable Rate Mortgages feature this cap, so they won't increase over a specific amount in a given period of time. 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. Sometimes an ARM features a "payment cap" that guarantees your payment will not increase beyond a certain amount in a given year. In addition, almost all adjustable programs have a "lifetime cap" — this cap means that your interest rate can't ever go over the capped percentage.

ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to get a very low introductory 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 could be stuck with rates that go up when they cannot sell or refinance with a lower property value.

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