Adjustable versus fixed rate loans

With a fixed-rate loan, your payment doesn't change for the entire duration of the mortgage. The amount of the payment that goes to principal (the amount you borrowed) will go up, but the amount you pay in interest will go down accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments for a fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay on the loan, more of your payment is applied to principal.

You might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can 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 even more varieties. ARMs usually adjust twice a year, based on various indexes.

The majority of ARMs feature this cap, so they can't increase above a specific amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in one period. Plus, the great majority of ARMs have a "lifetime cap" — this means that the interest rate can't ever exceed the capped amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit people who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't 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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