Fixed versus adjustable rate loans

A fixed-rate loan features the same payment over the life of the loan. The property tax and homeowners insurance will go up over time, but generally, payments on fixed rate loans change little over the life of the loan.

At the beginning of a a fixed-rate mortgage loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call C2 Financial Corporation at (727) 478-2797 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on a federal index. A few of these 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 ARM programs feature a cap that protects you from sudden increases in monthly payments. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment can't go above a fixed amount in a given year. Most ARMs also cap your rate over the life of the loan.

ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit people who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (727) 478-2797. We answer questions about different types of loans every day.

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