Differences between adjustable and fixed rate loans

A fixed-rate loan features a fixed payment amount over the life of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments on your fixed-rate mortgage will increase very little.

At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. The amount applied to principal increases up gradually every month.

Borrowers might 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 at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call First Community Bank of Central Al. at (334) 285-8850 to learn more.

There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most programs have a cap that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment can't go above a fixed amount over the course of a given year. The majority of ARMs also cap your rate over the duration of the loan period.

ARMs most often have their lowest rates toward the beginning of the loan. They usually guarantee the lower interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them because they want to get lower introductory rates and don't plan on remaining in the home longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (334) 285-8850. We answer questions about different types of loans every day.

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