Adjustable versus fixed rate loans

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A fixed-rate loan features a fixed payment over the life of your loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on these types of loans, vary little.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller percentage toward principal. This proportion reverses as the loan ages.  Thus it is advantageous to pay additional payments to reduce the principal during the early years of the mortgage. 

You can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they want to lock in this 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 have an Adjustable Rate Mortgage (ARM) now, I would love to assist you in locking a fixed-rate at a good rate. Call me, Sherry Bitner at 941-504-1445 or email me at Sherry@SherryBitner.com to learn more.

Adjustable Rate Mortgages — ARMs, as we call them above — come in many varieties. Generally, interest for ARMs are determined by an outside index. A few of these are: five year, or 10 year Treasury Security rate, or others.

Most programs have a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per adjustments, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, it caps the amount your monthly payment can increase in one period. Plus, the great majority of adjustable programs have a "lifetime cap" — this means that your rate will never exceed the cap amount.

ARMs most often have the lowest rates toward the beginning. They usually guarantee that rate from a three to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period, it adjusts every year. These types of loans are fixed for 3, 5, or 7 years, then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the initial rate lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell their home or refinance at the lower property value.  They can also be risky when you take a loan and anticipate an income increase that does not happen.  Fixed rates are always the best rate in a down market.  Don't buy into these types of loans if the interest rate is less than 10%.  You are only giving the lender a reason to increase your mortgage payment to meet their income. 

Have questions about mortgage loans? Call me, Sherry Bitner at 941-504-1445 or email me at Sherry@SherryBitner.com  I will always answer your questions about different types of loans with facts, wants, needs, and always give you advice to protect you. 

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