Adjustable versus fixed rate loans

A fixed-rate loan features the same payment amount over the life of the mortgage. The property tax and homeowners insurance will increase over time, but generally, payments on these types of loans don't increase much.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount applied to your principal amount goes up slowly each month.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in this lower 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 have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Refresh Funding at 305-800-3863 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are generally adjusted every six months, based on various indexes.

Most programs feature a "cap" that protects you from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in a given period. Almost all 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've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for people who expect to move in three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.

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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