Adjustable versus fixed loans

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With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but generally, payments on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. This proportion gradually reverses as the loan ages.

You 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 this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Community Mortgage Corp. at (630) 534-5500 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment will not increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the life of the loan period.

ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For 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 after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs are best for people who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (630) 534-5500. It's our job to answer these questions and many others, so we're happy to help!