Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment over the life of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments on your fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion gradually reverses itself as the loan ages.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call My FL Home Loans, Inc. at (727) 743-1620 to learn more.

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

Most ARMs are capped, which means they can't increase over a certain amount in a given period of time. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment can't go above a fixed amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan period.

ARMs usually start out at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for people who anticipate moving within three or five years. These types of ARMs are best for people who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (727) 743-1620. We answer questions about different types of loans every day.

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