Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment amount over the life of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for your fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. This proportion reverses itself as the loan ages.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, 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 for details.

There are many different types of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects you from sudden increases in monthly payments. Some ARMs won't adjust 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 rate directly, caps the amount your payment can go up in a given period. Additionally, the great majority of adjustable programs have a "lifetime cap" — your rate can't ever exceed the capped amount.

ARMs most often feature their lowest rates toward the beginning of the loan. They usually provide the lower interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for people who expect to move in three or five years. These types of ARMs are best for people who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan to stay in the house for any longer than this initial low-rate period. ARMs are risky when property values decrease and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at 407-834-3377. It's our job to answer these questions and many others, so we're happy to help!

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