Fixed versus adjustable rate loans

With a fixed-rate loan, your payment remains the same for the life of your loan. The amount of the payment that goes for principal (the loan amount) will go up, but the amount you pay in interest will go down accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on a fixed-rate loan will be very stable.

At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. This proportion gradually reverses as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), 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 to discuss how we can help.

There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.

Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment won't go above a certain amount over the course of a given year. Additionally, almost all ARMs have a "lifetime cap" — the interest rate can't exceed the cap amount.

ARMs most often feature the lowest rates toward the beginning of the loan. They guarantee that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values go down and borrowers are unable to sell or refinance their loan.

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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