Differences Between Fixed and Adjustable Loans

Fixed Rate Mortgages

With a fixed-rate loan, your payment stays the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on fixed-rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan to lock in a low-interest rate. People choose these types of loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed rate at a good rate. Call FundRes Mortgage at 973.249.7878 to learn more.

Adjustable Rate Mortgages 

ARMs, come in many varieties. Generally, interest rates for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), Secured Overnight Financing Rate (SOFR), or others.

Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment won't increase beyond a certain amount over the course of a given year. Additionally, the great majority of ARM programs feature a "lifetime cap" — this cap means that the rate can never exceed the capped percentage.

ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In 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 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for people who anticipate moving in three or five years. These types of ARMs most benefit borrowers who plan to move before the loan adjusts.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the house longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell their home or refinance with a lower property value.