Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments on your fixed-rate loan will be very stable.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage toward principal. The amount applied to principal goes up gradually each month.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Refresh Funding at 305-800-3863 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARMs are capped, which means they won't increase over a certain amount in a given period. 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 if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in a given period. The majority of ARMs also cap your rate over the duration of the loan.

ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 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 they adjust. These loans are usually best for people 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 initial lock expires.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan on staying in the home for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell or refinance at the lower property value.

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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