Differences between fixed and adjustable loans

With a fixed-rate loan, your payment doesn't change for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage toward principal. That gradually reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. 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 Seattle Mortgage Brokers LLC at 206-409-5626 (LOAN) (LOAN) to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.

The majority of ARMs feature this cap, which means they can't increase over a specific amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment won't go above a fixed amount in a given year. Plus, almost all ARMs have a "lifetime cap" — your rate can't exceed the cap amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for people who expect to move in three or five years. These types of ARMs are best for borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the house longer than this initial low-rate period. ARMs are risky when property values go down and borrowers can't sell their home or refinance their loan.