Differences between adjustable and fixed loans

A fixed-rate loan features the same payment amount for the entire duration of the mortgage. The property taxes and homeowners insurance will increase over time, but in general, payments on these types of loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage goes to principal. The amount paid toward your principal amount goes up slowly every month.

You might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call C2 Financial Corporation at (727) 478-2797 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes 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 are capped, which means they can't increase over a specified amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in one period. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs most often feature the lowest rates toward the beginning. They usually provide that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to remain in the house longer than this initial low-rate period. ARMs can be risky if property values decrease and borrowers can't sell or refinance their loan.

Have questions about mortgage loans? Call us at (727) 478-2797. It's our job to answer these questions and many others, so we're happy to help!

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