Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment amount over the life of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans don't increase much.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller percentage toward principal. This proportion reverses itself as the loan ages.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when 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 greater stability 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 the best rate currently available. Call New Millennium Mortgage Co. NMLS: 331173 at (941) 366-5800 to learn more.

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

Most ARM programs have a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment won't increase beyond a certain amount in a given year. Most ARMs also cap your interest rate over the duration of the loan.

ARMs usually start out at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate loans most benefit people who will move before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan to remain in the house for any longer than this 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. It's our job to answer these questions and many others, so we're happy to help!

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