Differences between fixed and adjustable loans

A fixed-rate loan features the same payment amount for the entire duration of the loan. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on these types of loans don't increase much.

When you first take out a fixed-rate loan, the majority the payment goes toward interest. As you pay , more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Miles Funding, LLC at 915-691-9072 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust every six months, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, so they can't increase over a certain amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment can't increase beyond a certain amount over the course of a given year. In addition, the great majority of adjustable programs have a "lifetime cap" — this cap means that your interest rate can't ever go over the cap amount.

ARMs most often have the lowest, most attractive rates toward the start. They usually guarantee the lower interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who will move before the loan adjusts.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell their home or refinance with a lower property value.