Fixed versus adjustable loans

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With a fixed-rate loan, your payment never changes for the entire duration of the loan. The portion allocated for your principal (the amount you borrowed) increases, however, the amount you pay in interest will decrease accordingly. The property taxes and homeowners insurance will increase over time, but in general, payments on fixed rate loans don't increase much.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller part toward principal. As you pay on the loan, more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Eastern Michigan Bank at 810.679.2500 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.

The majority of ARMs feature this cap, which means they won't go up above a certain amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment can't increase beyond a fixed amount in a given year. Almost all ARMs also cap your rate over the duration of the loan.

ARMs most often feature their lowest rates toward the start. They guarantee that rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the initial lock expires.

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

Have questions about mortgage loans? Call us at 810.679.2500. It's our job to answer these questions and many others, so we're happy to help!