Differences between fixed and adjustable rate loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the 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 in general, payment amounts on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount paid toward your principal amount goes up gradually every month.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate 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 offer greater 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 AAA Mortgage Solutions, LLC at 678-494-8250 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can increase in a given period. Most ARMs also cap your rate over the duration of the loan period.

ARMs most often feature the lowest rates at the beginning of the loan. They guarantee the lower rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 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 adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell their home or refinance at the lower property value.