Differences between adjustable and fixed rate loans

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With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. 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 payments for your fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay , more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. 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 Mortgage Solutions of Central Florida, Inc. at (407) 294-4707 to discuss how we can help.

There are many kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month or one year Libor rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages are capped, so they can't increase over a specific amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment will not increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the life of the loan.

ARMs usually start out at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then 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 within three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.

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