Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment stays the same for the entire duration of your mortgage. The amount allocated for your principal (the amount you borrowed) goes up, however, the amount you pay in interest will decrease accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for a fixed-rate loan will be very stable.

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

Borrowers can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call First Southeast Mortgage Corporation at 954.920.9799 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.

The majority of ARMs are capped, which means they can't go up above a specific amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your payment can increase in one period. Plus, the great majority of adjustable programs feature a "lifetime cap" — this cap means that your interest rate won't go over the cap amount.

ARMs usually start out at a very low rate that usually increases over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on staying in the house longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell their home 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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