What are the advantages of fixed rate
    versus adjustable rate loans?

    With a fixed-rate loan, your monthly payment of principal
    and interest never change for the life of your loan. Your
    property taxes may go up, and so might the homeowner's
    insurance premium part of your monthly payment, but
    generally with a fixed-rate loan your payment will remain
    very stable.

    Fixed-rate loans are available in all sorts of shapes and
    sizes: 30-year, 20-year, 15-year, even 10-year. Some fixed-
    rate mortgages are called "biweekly" mortgages and
    shorten the life of your loan. You pay every two weeks, a
    total of 26 payments a year -- which adds up to an "extra"
    monthly payment every year.

During the early amortization period of a fixed-rate loan, a large percentage of your
monthly payment goes toward interest, and a much smaller part toward principal. That
gradually reverses itself as the loan ages.

You might choose a fixed-rate loan if you want to lock in a low rate. If you have an
Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can give you
more monthly payment stability.

Adjustable Rate Mortgages -- ARMs, as we called them above -- come in even more
varieties. Generally, ARMs determine what you must pay based on an outside index,
perhaps the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security
rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
They may adjust every six months or once a year.

Most ARM programs have a "cap" that protects you from your monthly payment going up
too much at once. There may be a cap on how much your interest rate can go up in one
period -- say, no more than two percent per year, even if the underlying index goes up by
more than two percent. You may have a "payment cap," that instead of capping the
interest rate directly caps the amount your monthly payment can go up in one period. In
addition, almost all ARM programs have a "lifetime cap" -- your interest rate can never
exceed that cap amount, no matter what.

ARMs often have their lowest, most attractive rates at the beginning of the loan. The
"introductory rate," as it's often called, may remain fixed for the initial period of the loan --
anywhere from one month to ten years.  You may hear people talking about or read
about what are called "3/1 ARMs" or "5/1 ARMs" or the like. That means that the
introductory rate is set for three or five years, and then adjusts according to an index
every year thereafter for the life of the loan. Loans like this are often best for people who
anticipate moving -- and therefore selling the house to be mortgaged -- within three or
five years, depending on how long the lower rate will be in effect.  However, even if you
plan to stay in your home for as long as 10 years, a 5/1 ARM could still save you money
over a fixed rate loan in the long run.

You might choose an ARM to take advantage of a lower introductory rate and count on
either moving, refinancing again or simply absorbing the higher rate after the
introductory rate goes up. With ARMs, you do risk your rate going up, but you also take
advantage when rates go down by pocketing more money each month that would
otherwise have gone toward your mortgage payment.
Charter Lending 6908 Summerbridge Drive Tampa, FL 33634-2255
Phone: (813) 514-4993 Fax: (813) 864-0341 E-mail: Dave@CharterLendingOnline.com
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