Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment stays the same for the entire duration of your loan. The amount of the payment allocated for your principal (the actual loan amount) will increase, however, your interest payment will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage toward principal. That reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call America's Money Source at (407) 898-7559 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment will not go above a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. 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. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values go down and borrowers are unable to sell or refinance.
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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