Fixed versus adjustable loans

With a fixed-rate loan, your payment doesn't change for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. This proportion gradually reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call New Millennium Mortgage Co. NMLS: 331173 at (941) 366-5800 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.

Most programs feature a "cap" that protects you from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures that your payment can't increase beyond a fixed amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan period.

ARMs usually start 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". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers cannot sell their home or refinance.

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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