Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans change little over the life of the loan.

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

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Halpern & Associates Mortgage Corporation at (305) 535-2230 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest on ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment can't increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate programs are best for borrowers who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (305) 535-2230. We answer questions about different types of loans every day.

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