Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment doesn't change for the life of your mortgage. The amount of the payment that goes for principal (the loan amount) will increase, but the amount you pay in interest will go down accordingly. The property tax and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans don't increase much.

At the beginning of a a fixed-rate loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency 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 First Southeast Mortgage Corporation at 954.920.9799 for details.

There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.

Most Adjustable Rate Mortgages are capped, so they won't increase above a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment won't go above a fixed amount in a given year. Plus, the great majority of adjustable programs have a "lifetime cap" — this cap means that the interest rate can never go over the capped amount.

ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of ARMs are best for people who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the house longer than the initial low-rate period. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 954.920.9799. We answer questions about different types of loans every day.

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