Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment amount over the life of your loan. The property taxes and homeowners insurance may go up over time, but for the most part, payments on these types of loans do not increase much.

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

Borrowers select fixed-rate loans because interest rates are low, and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we will be glad to help you lock in a fixed-rate at the best rate currently available. Call American First Bancorp, Inc. at 330-492-7757 to discuss your situation with one of our professionals.

There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months based on various indexes.

Most ARMs feature this cap, which means they will not increase above a certain amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the underlying index goes up by more than two percent. Your loan may feature a "payment cap," meaning instead of capping the interest rate directly, caps are placed on the amount that the payment can increase in a given period. Plus, almost all adjustable programs have a "lifetime cap" — the interest rate cannot go over the cap amount.

ARMs most often have their lowest rates toward the beginning of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You may have heard 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 a certain number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.

You might choose an ARM to get a very low initial interest rate, plan on moving, refinance the loan, or absorb the higher rate after the introductory rate goes up. ARMs are risky if property values decrease, and borrowers cannot sell or refinance.

Have questions about mortgage loans? Call us at 330-492-7757. We are experts in answering questions about different types of loans.