Fixed versus adjustable loans

A fixed-rate loan features a fixed payment amount over the life of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate loan will increase very little.

At the beginning of a a fixed-rate mortgage loan, most of your payment is applied to interest. As you pay , more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Northeast Bancorp of America, Inc. at (440) 234-9660 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest rates on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, which means they won't increase above a specified amount in a given period. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment will not increase beyond a fixed amount in a given year. Plus, almost all ARMs have a "lifetime cap" — this means that your interest rate can't ever exceed the cap percentage.

ARMs most often feature their lowest, most attractive rates at the start. They guarantee that interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for people who expect to move in three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.

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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