Differences between adjustable and fixed rate loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The amount allocated for principal (the actual loan amount) will go up, but your interest payment will decrease in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on your fixed-rate loan will increase very little.

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller part toward principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call Metro Mortgage Lending at 502-491-0749 to discuss your situation with one of our professionals.

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

Most programs feature a cap that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment will not go above a fixed amount over the course of a given year. Plus, almost all adjustable programs feature a "lifetime cap" — the rate will never exceed the cap percentage.

ARMs most often feature their lowest rates at the start of the loan. They provide that rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For 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 after the initial period. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit people who plan to move before the loan adjusts.

You might choose an ARM to take advantage of a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot sell their home or refinance with a lower property value.