Differences between adjustable and fixed rate loans

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With a fixed-rate loan, your payment doesn't change for the life of the 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, payment amounts on fixed rate loans don't increase much.

During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part toward principal. This proportion gradually reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more 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 a favorable rate. Call Mortgage Xperts at 352-347-3303 to discuss how we can help.

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most programs have a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in one period. In addition, the great majority of ARMs feature a "lifetime cap" — this cap means that the interest rate will never exceed the capped percentage.

ARMs usually start at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who expect to move within three or five years. These types of ARMs are best for people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they cannot sell or refinance at the lower property value.

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