Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts for your fixed-rate mortgage will be very stable.

During the early amortization period of 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.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call First Southeast Mortgage Corporation at 954.920.9799 to discuss how we can help.

There are many kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment will not go above a fixed amount in a given year. Almost all ARMs also cap your rate over the life of the loan period.

ARMs most often have their lowest rates at the start. They guarantee the lower interest rate for an initial period that varies greatly. You may have heard 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 they adjust. These loans are best for people who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't sell 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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