Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment over the life of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on your fixed-rate mortgage will increase very little.

At the beginning of a a fixed-rate loan, most of your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.

You might 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 low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call America's Money Source at (407) 898-7559 to discuss your situation with one of our professionals.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages feature this cap, so they won't increase over a specified amount in a given period of time. There may be a cap on how much your interest rate can increase 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 your payment can increase in one period. Most ARMs also cap your rate over the duration of the loan period.

ARMs most often feature the lowest rates toward the start. They provide that interest rate for an initial period that varies greatly. 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 loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for people who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't 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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