Fixed versus adjustable loans

A fixed-rate loan features the same payment amount over the life of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for your fixed-rate mortgage will be very stable.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller percentage goes to principal. The amount applied to your principal amount goes up gradually every month.

Borrowers can choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can 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 learn more.

There are many types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, which means they won't go up above a certain amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can increase in one period. Additionally, almost all ARM programs feature a "lifetime cap" — this means that your interest rate can't ever exceed the capped percentage.

ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky if property values go down and borrowers cannot sell their home or refinance.

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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