Fixed versus adjustable rate loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of your mortgage. The portion allocated to principal (the actual loan amount) will go up, however, your interest payment will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts 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 primarily to pay interest. The amount applied to your principal amount goes up gradually every month.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers 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 into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call First Southeast Mortgage Corporation at 954.920.9799 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment can't go above a certain amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature the lowest, most attractive rates toward the beginning. They guarantee that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are best for borrowers who expect to move within three or five years. These types of ARMs most benefit borrowers who will move before the initial lock expires.

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on remaining in the home for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 954.920.9799. It's our job to answer these questions and many others, so we're happy to help!

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