Fixed versus adjustable rate loans

With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for your fixed-rate loan will be very stable.

During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a much smaller percentage goes to principal. 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 interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call First Southeast Mortgage Corporation at 954.920.9799 to discuss your situation with one of our professionals.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a "cap" that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment can't go above a fixed amount in a given year. In addition, the great majority of ARM programs have a "lifetime cap" — the rate won't go over the capped amount.

ARMs usually start out at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to get a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell their home or refinance at the 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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