Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment for the entire duration of your loan. The property taxes and homeowners insurance will go up over time, but generally, payments on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount applied to principal increases up slowly every month.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Olympic Mortgage at (408) 293-7878 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a cap that protects you 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. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in one period. Additionally, the great majority of ARM programs have a "lifetime cap" — your interest rate won't exceed the capped amount.

ARMs most often feature the lowest, most attractive rates at the beginning. They provide the lower interest rate from a month to ten years. 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. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a very low introductory rate and count 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 when they cannot sell their home or refinance at the lower property value.