Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment over the life of the mortgage. The property tax and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount paid toward principal increases up slowly each month.

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 low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more 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 Refresh Funding at 305-800-3863 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest for ARMs are based on an outside 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.

Most Adjustable Rate Mortgages feature this cap, so they can't increase over a specified amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment won't increase beyond a certain amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan.

ARMs usually start out at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed 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 often best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs are risky if property values go down and borrowers are unable to sell their home or refinance.

Have questions about mortgage loans? Call us at 305-800-3863. We answer questions about different types of loans every day.

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