Adjustable versus fixed loans
A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of 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 offer 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 the best rate currently available. Call America's Money Source at (407) 898-7559 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. Almost all ARMs also cap your rate over the life of the loan period.
ARMs most often feature their lowest rates toward the start. They guarantee the lower interest 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 fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values go down and borrowers cannot 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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