Fixed versus adjustable loans

With a fixed-rate loan, your payment stays the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. 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 on a fixed-rate loan will increase very little.

Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part toward principal. This proportion gradually reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call First American Financial at 770-270-9044 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust every six months, based on various indexes.

Most ARMs feature this cap, which means they won't increase over a certain amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment won't go above a fixed amount in a given year. Plus, the great majority of ARM programs have a "lifetime cap" — this means that your interest rate can't ever exceed the capped percentage.

ARMs most often feature the lowest, most attractive rates at the beginning. They usually guarantee the lower interest 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. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust. These loans are usually best for people who anticipate moving in three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers can't sell or refinance.