Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate loan will increase very little.

When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. The amount applied to your principal amount increases up gradually each month.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. 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 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest on ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment will not increase beyond a certain amount over the course of a given year. Additionally, the great majority of ARMs have a "lifetime cap" — this means that the interest rate will never go over the capped percentage.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the loan adjusts.

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

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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