Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts for a fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount paid toward your principal amount goes up slowly every month.

You can 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 at this 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 assist you in locking a fixed-rate at the best rate currently available. Call New Millennium Mortgage Co. NMLS: 331173 at (941) 366-5800 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, which means they can't increase above a specific amount in a given period of time. 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 though the index the rate is based on goes up by more than two percent. 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. Plus, the great majority of ARMs have a "lifetime cap" — this cap means that your rate can't go over the cap percentage.

ARMs usually start out at a very low rate that usually increases as the loan ages. 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. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (941) 366-5800. We answer questions about different types of loans every day.

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