Differences between fixed and adjustable loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate mortgage will increase very little.

When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. That reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Northeast Bancorp of America, Inc. at (440) 234-9660 for details.

There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most ARM programs feature a cap that protects you from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can increase in a given period. In addition, almost all ARM programs feature a "lifetime cap" — this cap means that your interest rate can't ever exceed the capped amount.

ARMs most often feature the lowest rates at the beginning of the loan. They provide the lower interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed 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 adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs most 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 if they cannot sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (440) 234-9660. We answer questions about different types of loans every day.

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