Fixed versus adjustable loans

With a fixed-rate loan, your payment doesn't change for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for a fixed-rate loan will be very stable.

Early in a fixed-rate loan, most of your payment pays interest, and a much smaller percentage toward principal. As you pay on the loan, more of your payment goes toward principal.

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

There are many types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can increase in a given period. Most ARMs also cap your interest rate over the duration of the loan.

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". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to get lower introductory rates and do not plan on remaining in the house longer than the initial low-rate period. ARMs are risky if property values decrease and borrowers can't sell their home 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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