Fixed versus adjustable rate loans

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A fixed-rate loan features a fixed payment for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on these types of loans vary little.

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

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with 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 SoFlo:AM at 954-375-7774 to discuss how we can help.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases 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 goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in one period. Additionally, almost all adjustable programs have a "lifetime cap" — this cap means that your rate can't exceed the capped amount.

ARMs most often feature the lowest rates toward the beginning. They usually provide the lower rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to get a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values decrease and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 954-375-7774. We answer questions about different types of loans every day.

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