Differences between fixed and adjustable loans

A fixed-rate loan features the same payment amount over the life of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for a fixed-rate loan will increase very little.

When you first take out a fixed-rate loan, the majority your payment is applied to interest. The amount applied to your principal amount increases up gradually each month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose 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 monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call Alerus Mortgage at 952 417 8481 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are normally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, which means 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. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your payment can go up in a given period. In addition, almost all adjustable programs feature a "lifetime cap" — this cap means that your interest rate won't exceed the capped percentage.

ARMs most often have the lowest rates toward the start. They provide the lower rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for people who anticipate moving within three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on remaining in the home for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 952 417 8481. We answer questions about different types of loans every day.

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