Adjustable versus fixed loans

With a fixed-rate loan, your payment doesn't change for the entire duration of the mortgage. The portion allocated for principal (the loan amount) goes up, but your interest payment will decrease in the same amount. 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 be very stable.

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

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into 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 a favorable rate. Call First Southeast Mortgage Corporation at 954.920.9799 for details.

There are many different types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (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 ARMs feature this cap, so they can't increase above a specific amount in a given period of time. There may be 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 though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment won't go above a certain amount over the course of a given year. In addition, almost all ARMs have a "lifetime cap" — this cap means that your interest rate won't exceed the capped percentage.

ARMs most often feature the lowest rates at the beginning of the loan. They guarantee the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit people who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 954.920.9799. We answer questions about different types of loans every day.

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