Fixed Vs. Adjustable

What are the advantages of fixed rate versus adjustable rate loans?

With a fixed-rate loan, the monthly payment of principal and interest never changes for the life of the loan. Your property taxes may go up if the value of the property increases, which may also affect the cost of your homeowner’s insurance premium. Many homeowners choose a fixed-rate loan for the long-term stability it provides.

Fixed-rate loans are available for both short and long periods of time: 30-year,20-year, 15-year, and sometimes 10-year. Some fixed-rate mortgages are structured as”biweekly” mortgages that shorten the life of your loan. Payments are due every two weeks, a total of26 payments a year — which adds up to an “extra” monthly payment every year.

During the early amortization period of a fixed-rate loan, a large percentage of the monthly payment goes towards the interest, and a much smaller part towards the principal. That gradually reverses itself as the loan ages.

You might want to consider a fixed-rate loan if you want to lock in a lowrate. If you have an Adjustable RateMortgage (ARM) now, refinancing with a fixed-rate loan can give you more monthly payment stability.

Adjustable Rate Mortgages – (also known as “ARM”s) area vailable with several different options. Generally, ARMs determine your monthly payment based on an outside index, such as: the current 6-month rate for a Certificate of Deposit (CD), the current one-year Treasury Security rate, the Federal Home Loan Bank’s 11th District Cost of Funds Index (COFI), and several others. They are adjusted either every six months or once a year.

Most programs have a “cap” that protects the homeowner from a drastic increase in the monthly payment over short periods of time. There may be a cap on how much the interest rate can go up in one period – for example, no more than two percent per year,even if the underlying index goes up by more than two percent. There may be a “payment cap” in place that directly caps the increase in monthly payment over one period, as opposed to capping the interest rate. In addition, nearly all ARM programs have a “lifetime cap” meaning that interest rate can never exceed a predetermined cap amount.

ARMs often have their lowest, most attractive rates at the beginning of the loan period, and can guarantee that rate for any period of time between a month and ten years. Different adjustable rate mortgages may be referred to as “3/1 ARMs” or “5/1 ARMs.” The first number represents the fixed period for the introductory rate, in this case for either three or five years. After the introductory period, the rate is then adjusted according to an index every 6 or 12 months thereafter for the life of the loan.

Adjustable rate mortgages are often best for homeowners who anticipatemoving and selling the house before the mortgage is completed. Adjustable rate mortgages are a good choiceif you want to take advantage of a lower introductory rate and plan to eithermove, refinance again or simply absorb the higher rate after the introductoryrate goes up.