Fixed versus adjustable loans

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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 payments for your fixed-rate loan will be very stable.

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

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Main Line National Mtg Inc at (610) 296-3600 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment will not go above a fixed amount in a given year. Additionally, almost all ARM programs feature a "lifetime cap" — the interest rate won't exceed the capped amount.

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

You might choose an ARM to get a lower initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at (610) 296-3600. We answer questions about different types of loans every day.