Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate loan will increase very little.

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

You 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 the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability 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 First Community Bank of Central Al. at (334) 285-8850 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment can't increase beyond a certain amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan period.

ARMs usually start at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of adjustable rate programs most benefit people who plan to move before the loan adjusts.

You might choose an ARM to get a very low initial interest rate and count 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 increasing rates if they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (334) 285-8850. It's our job to answer these questions and many others, so we're happy to help!

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