Loan Types

As a borrower, one of your first choices is whether you want a fixed-rate or an adjustable-rate mortgage loan. All loans fit into one of these two categories. Here’s the primary difference between the two types:

Fixed Rate Loans:

Fixed-rate mortgage loans have the same interest rate for the entire life of the loan. Because of this, the size of your monthly payment will stay the same month after month, and result in a portion of the loan’s principal being paid down every month. The consistency in the monthly payment makes budgeting easier for homeowners.

Fixed-rate mortgages are offered in a variety of terms, the most common of which are 30, 20 and 15 years. Most mortgage lenders offer fixed-rate mortgages in all of their Conventional, FHA, VA and Jumbo loan products.

The main benefit of a fixed-rate loan is that the borrower is protected from sudden increases in monthly mortgage payments if interest rates rise. The downside to fixed-rate mortgages is that when interest rates are high, qualifying for a loan is more difficult because the payments are less affordable.

Adjustable Rate Mortgage Loans:

Adjustable-rate mortgage loans (ARMs) have an interest rate that will change or “adjust” from time to time. An adjustable-rate mortgage has a short-term fixed-rate term during which an interest rate is fixed. After this initial term, the interest rate on an “ARM” loan can change periodically at certain intervals. For instance, the 5/1 ARM loan carries a fixed rate of interest for the first five years, after which it begins to adjust every one year, or annually. This adjustment allows the lender to adjust the interest rate to match changing interest rate environments.

ARMs appeal to borrowers because they offer low initial payments, enable the borrower to qualify for a larger loan and in a falling interest rate environment, allow the borrower to enjoy lower interest rates (and lower mortgage payments) without the need to refinance. However, the “ARM” can pose some significant downsides. With an “ARM”, your monthly payment may change frequently over the life of the loan. And if you take on a large loan, you could be in trouble when interest rates rise.

All mortgage products are subject to credit and property approval. Rates, program terms, and conditions are subject to change without notice. Not all products are available in all states or for all amounts. Additional conditions, qualifications, and restrictions may apply. This is not an offer for extension of credit or a commitment to lend. Please contact Capstone Home Loans for more information.