Differences between fixed and adjustable rate loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your mortgage. The portion that goes to principal (the loan amount) will go up, but your interest payment will go down in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments on a fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion gradually reverses as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in 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 different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most ARM programs have a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in a given period. Most 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've probably heard of 5/1 or 3/1 ARMs. For 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 borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan on staying in the house for any longer than this introductory low-rate period. ARMs are risky if property values go down and borrowers are unable to sell 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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