Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate mortgage will be very stable.

When you first take out a fixed-rate mortgage loan, the majority the payment goes toward interest. The amount applied to your principal amount goes up slowly each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call America's Money Source at (407) 898-7559 for details.

There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

Most programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in a given period. Plus, the great majority of ARMs feature a "lifetime cap" — the interest rate can't go over the cap amount.

ARMs most often feature the lowest, most attractive rates at the beginning. They usually guarantee the lower rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of ARMs are best for people who plan to move before the loan adjusts.

You might choose an ARM to get a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (407) 898-7559. It's our job to answer these questions and many others, so we're happy to help!

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