Differences between fixed and adjustable loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on your fixed-rate mortgage will be very stable.

When you first take out a fixed-rate loan, the majority your payment is applied to interest. That reverses itself as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call C2 Financial Corporation at (727) 478-2797 to discuss how we can help.

There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs have a cap that protects you from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment can't increase beyond a certain amount in a given year. Plus, almost all ARM programs feature a "lifetime cap" — your rate can't exceed the cap percentage.

ARMs usually start out at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed 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 after the initial period. Loans like this are best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for borrowers who plan to sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan to remain in the house for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell or refinance with a 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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