Differences between adjustable and fixed rate loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments for a fixed-rate mortgage will increase very little.

When you first take out a fixed-rate loan, the majority your payment is applied to interest. This proportion reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer 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 to discuss how we can help.

There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.

Most ARMs feature this cap, so they can't increase 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 feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in one period. Plus, the great majority of adjustable programs have a "lifetime cap" — this means that your interest rate will never exceed the cap percentage.

ARMs most often have their lowest rates at the beginning of the loan. They usually guarantee the lower rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who expect to move within three or five years. These types of ARMs benefit borrowers who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell or refinance with a lower property value.

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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