Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but for the most part, payments on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount paid toward principal increases up gradually every month.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can 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.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, which means they won't increase above a specified amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment won't go above a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the life of the loan period.

ARMs most often have their lowest, most attractive rates at the beginning of the loan. They provide the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for borrowers who expect to move in three or five years. These types of ARMs benefit people who will move before the loan adjusts.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to stay in the house longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at (941) 366-5800. It's our job to answer these questions and many others, so we're happy to help!

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