Fixed versus adjustable loans

A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on a fixed-rate loan will increase very little.

At the beginning of a a fixed-rate mortgage loan, most of the payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Metro Mortgage at 866-300-1550 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest for ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in a given period. Almost all ARMs also cap your rate over the life of the loan period.

ARMs usually start out at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who will move before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on remaining in the home longer than this introductory low-rate period. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance.