Adjustable versus fixed rate loans

A fixed-rate loan features the same payment over the life of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up 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 part toward principal. As you pay on the loan, more of your payment goes toward principal.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Gold Medal Mortgage, Inc. at 440-934-2100 to learn more.

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

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. 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" that instead of capping the interest rate directly, caps the amount the monthly payment can increase in a given period. Additionally, the great majority of ARM programs feature a "lifetime cap" — this means that the interest rate can't ever go over the capped 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 introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan on remaining in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell or refinance at the lower property value.