Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment amount over the life of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on fixed rate loans don't increase much.

When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. That reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because 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 offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Churchill Mortgage Company at (703) 551-4107 for details.

There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.

Most ARMs are capped, so they won't increase over a specific amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment can't increase beyond a fixed amount in a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start at a very low rate that may increase as the loan ages. You may hear people talking 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 a number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of ARMs are best for people who plan to move before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on remaining in the home longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers can't sell or refinance their loan.

Have questions about mortgage loans? Call us at (703) 551-4107. We answer questions about different types of loans every day.


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