Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for your fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate mortgage loan, most of the payment goes toward interest. This proportion reverses itself as the loan ages.

You can choose a fixed-rate loan to lock in a low interest 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 with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call America's Money Source at (407) 898-7559 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.

Most ARM programs feature a "cap" that protects borrowers 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 underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment can't increase beyond a fixed amount in a given year. Plus, almost all adjustable programs have a "lifetime cap" — your interest rate can never exceed the cap amount.

ARMs most often have their lowest, most attractive rates at the beginning of the loan. They usually guarantee the lower rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (407) 898-7559. We answer questions about different types of loans every day.

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