Differences between fixed and adjustable rate loans

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With a fixed-rate loan, your payment remains the same for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but in general, payments on these types of loans don't increase much.

At the beginning of a a fixed-rate mortgage loan, most of your payment is applied to interest. 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 rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call America's Mortgage Link, Inc. NMLS#210275 at 727-393-9399 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are normally adjusted every six months, based on various indexes.

Most Adjustable Rate Mortgages are capped, which means they can't increase over a specified amount in a given period of time. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment won't increase beyond a certain amount over the course of a given year. In addition, almost all adjustable programs have a "lifetime cap" — this cap means that your interest rate will never go over the cap amount.

ARMs most often feature the lowest, most attractive rates at the beginning. They provide that rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so because they want to get lower introductory rates and don't plan to stay in the home longer than the introductory low-rate period. ARMs can be risky if property values decrease and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at 727-393-9399. It's our job to answer these questions and many others, so we're happy to help!

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