Differences between adjustable and fixed rate loans

With a fixed-rate loan, your payment never changes for the entire duration of your loan. The amount of the payment allocated for your principal (the amount you borrowed) goes up, but the amount you pay in interest will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. This proportion reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call New Millennium Mortgage Co. NMLS: 331173 at (941) 366-5800 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest on ARMs are determined by a federal index. A few of these 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.

The majority of ARMs feature this cap, so they won't increase above a specific amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. Additionally, the great majority of ARM programs have a "lifetime cap" — the rate will never go over the capped amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed 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 adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of ARMs most benefit people who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky when property values decrease and borrowers are unable to sell their home 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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