Adjustable versus fixed loans

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A fixed-rate loan features the same payment over the life of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on fixed rate loans don't increase much.

When you first take out a fixed-rate loan, most of your payment goes toward interest. That reverses as the loan ages.

You can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Twenty First Century Mortgage Services, Inc. at 727-392-4227 to learn more.

There are many types of Adjustable Rate Mortgages. Generally, the interest 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 Adjustable Rate Mortgages are capped, which means they can't increase over a specific amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment won't increase beyond a certain amount over the course of a given year. Plus, almost all adjustable programs feature a "lifetime cap" — this means that the interest rate will never exceed the capped amount.

ARMs most often feature their lowest rates toward the start of the loan. They usually guarantee the lower rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. In 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 adjust. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values decrease and borrowers are unable to sell or refinance their loan.

Have questions about mortgage loans? Call us at 727-392-4227. It's our job to answer these questions and many others, so we're happy to help!

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