Fixed versus adjustable loans

With a fixed-rate loan, your payment doesn't change for the entire duration of the loan. The amount allocated to your principal (the amount you borrowed) goes up, but the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount applied to principal goes up slowly each month.

You might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call First Washington Mortgage at 888-625-1491 to learn more.

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

Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment can't increase beyond a certain amount in a given year. Plus, almost all adjustable programs have a "lifetime cap" — the rate will never exceed the capped percentage.

ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who plan to move before the loan adjusts.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan on staying in the home longer than this initial low-rate period. ARMs are risky if property values go down and borrowers can't sell their home or refinance.