Differences between adjustable and fixed loans

With a fixed-rate loan, your payment never changes for the life of the loan. The portion that goes to principal (the actual loan amount) increases, but your interest payment will go down 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, payment amounts on fixed rate loans don't increase much.

Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage toward principal. That reverses itself as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. People choose these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call America's Money Source at (407) 898-7559 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most ARM programs have a cap that protects you from sudden increases in monthly payments. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment can't go above a fixed amount in a given year. Plus, almost all adjustable programs have a "lifetime cap" — this means that your rate will never go over the cap percentage.

ARMs most often have the lowest rates toward the beginning. They guarantee that rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit people who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell or refinance at the 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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