Differences between adjustable and fixed rate loans

A fixed-rate loan features a fixed payment amount over the life of the loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.

Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage toward principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Cypress Mortgage at 312-829-1010 to learn more.

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

Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment won't increase beyond a certain amount over the course of a given year. Additionally, the great majority of adjustable programs have a "lifetime cap" — your interest rate can't ever exceed the capped percentage.

ARMs most often feature their lowest, most attractive rates toward the beginning of the loan. They guarantee that interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then 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 people who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky when property values decrease and borrowers are unable to sell or refinance their loan.