Adjustable versus fixed loans

A fixed-rate loan features the same payment for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on a fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward principal increases up slowly every month.

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

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust every six months, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, which means they won't increase over a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can go up in a given period. Most ARMs also cap your rate over the life of the loan period.

ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In 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 after the initial period. Loans like this are often best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell or refinance with a lower property value.

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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