Differences between fixed and adjustable loans

With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The portion allocated for your principal (the amount you borrowed) increases, but the amount you pay in interest will decrease in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. This proportion reverses as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Milestone Mortgage Corp at 561-207-8082 to discuss your situation with one of our professionals.

There are many kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, so they won't go up above a certain amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can increase in a given period. In addition, almost all adjustable programs have a "lifetime cap" — this cap means that the rate can never exceed the cap amount.

ARMs usually start at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are usually best for borrowers who expect to move within three or five years. These types of ARMs most benefit people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 561-207-8082. It's our job to answer these questions and many others, so we're happy to help!

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