Adjustable versus fixed loans

A fixed-rate loan features a fixed payment amount over the life of the loan. The property tax and homeowners insurance will go up over time, but for the most part, payments on these types of loans don't increase much.

Early in a fixed-rate loan, most of your payment pays interest, and a much smaller percentage toward principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call AmeriBest Mortgage at (321) 777-7277 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in one period. Almost all ARMs also cap your rate over the duration of the loan period.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the home longer than the introductory low-rate period. ARMs are risky when property values go down and borrowers are unable to sell or refinance.

Have questions about mortgage loans? Call us at (321) 777-7277. It's our job to answer these questions and many others, so we're happy to help!

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