Adjustable versus fixed loans

A fixed-rate loan features the same payment amount for the entire duration of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments for a fixed-rate mortgage will be very stable.

Early in a fixed-rate loan, most of your payment pays interest, and a much smaller part goes to principal. The amount paid toward principal increases up gradually every month.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when 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 provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call New Millennium Mortgage Co. NMLS: 331173 at (941) 366-5800 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest rates on ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, so they won't increase above a specific amount in a given period. 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 though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment can't increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan period.

ARMs most often have the lowest rates at the start of the loan. They provide the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit people who plan to move before the initial lock expires.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on staying in the home longer than the initial low-rate period. ARMs can be risky when housing prices go down 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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