Adjustable versus fixed loans

A fixed-rate loan features the same payment amount over the life of your mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments on a fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Metro Mortgage at 866-300-1550 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, so they can't go up 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" that ensures your payment won't increase beyond a fixed amount in a given year. The majority of ARMs also cap your rate over the duration of the loan period.

ARMs most often have their lowest rates toward the start of the loan. They usually provide the lower interest rate from a month to ten years. 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 loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on staying in the home for any longer than this initial low-rate period. ARMs can be risky if property values go down and borrowers cannot sell or refinance their loan.