Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Contemporary Mortgage Services, Inc at 407-834-3377 to learn more.

There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.

Most ARMs are capped, so they won't go up above a specific amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment won't go above a certain amount over the course of a given year. Additionally, almost all adjustable programs have a "lifetime cap" — this means that the interest rate can't ever exceed the cap amount.

ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers cannot 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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