Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for your fixed-rate loan will be very stable.

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

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in the lower 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 currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call County-City Credit Union at (920) 674-5542 to learn more.

There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs have a cap that protects you from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment won't increase beyond a fixed amount in a given year. Most ARMs also cap your rate over the duration of the loan period.

ARMs most often feature their lowest, most attractive rates toward the beginning. They usually guarantee that rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it 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 expect to move within three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.

You might choose an ARM to get a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell their home or refinance at the lower property value.