Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for your fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate loan, the majority your payment is applied to interest. That gradually reverses itself as the loan ages.
You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call New Millennium Mortgage Co. NMLS: 331173 at (941) 366-5800 to learn more.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment will not increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature their lowest, most attractive rates at the beginning. They usually provide that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set 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 best for people who expect to move within three or five years. These types of adjustable rate loans most benefit people who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell their home or refinance with a 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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