Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but generally, payments on these types of loans don't increase much.

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

Borrowers might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they want to lock in at the lower 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'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Contemporary Mortgage Services, Inc at 407-834-3377 to learn more.

There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can go up in a given period. The majority of ARMs also cap your interest rate over the life of the loan.

ARMs most often have the lowest rates at the beginning of the loan. They usually provide the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the home for any longer than the initial low-rate period. ARMs can be risky if property values decrease and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at 407-834-3377. We answer questions about different types of loans every day.

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