Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of the mortgage. The amount that goes for principal (the loan amount) will go up, however, your interest payment will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans vary little.

At the beginning of a a fixed-rate loan, most of your payment is applied to interest. The amount paid toward your principal amount goes up gradually every month.

You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call James M. Dix at (317) 288-9434 to learn more.

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

Most programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment can't go above a certain amount in a given year. Plus, the great majority of adjustable programs have a "lifetime cap" — your rate won't exceed the cap amount.

ARMs usually start out at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who expect to move within three or five years. These types of ARMs are best for borrowers who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values decrease and borrowers cannot sell or refinance.