A fixed-rate loan, allows for your monthly payment of principal and interest to remain the same for the life of your loan. Fixed-rate loans are available in many types; 30-year, 20-year, 15-year, and 10-year. You have the option of a bi-weekly mortgage which shortens the life of the loan. This is done by paying every two weeks, which equals out to 26 payments a year, giving you an extra monthly payment every year.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes towards the interest, and a smaller portion towards your principle. This gradually reverses itself as the loan ages.
Adjustable rate mortgages, or ARMs, come in many more varieties. Mostly ARMs determine what you must pay based on an outside index. They usually adjust every 6 months or once a year.
Most programs have a sort of “cap” that protects you from your monthly payment going up too much. In addition, almost all ARM programs have a “lifetime cap” in which your interest rate can never exceed that cap amount… ever.
ARMs usually have their lowest, most attractive rates at the beginning of the loan, and guarantee that rate for any where from a month to 10 years. For example “3/1 ARMs” or “5/1 ARMs” mean that the introductory rate is set for 3 or 5 years, and then adjust according to an index every year thereafter, for the life of the loan. These types of loans are often best for people who may be moving and selling their home within 3 or 5 years, depending on how long the lower rate will be in effect.
With ARMs, you do however risk your rate going up, but keep in mind you are also able to take advantage when the rates go down, by keeping more money in your pocket each month that would otherwise have gone toward your mortgage payment.
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