Adjustable versus fixed loans

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

When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. That gradually reverses itself as the loan ages.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide 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 a favorable rate. Call First Community Bank of Central Al. at (334) 285-8850 to learn more.

There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.

Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment won't increase beyond a fixed amount over the course of a given year. The majority of ARMs also cap your rate over the duration of the loan.

ARMs most often have their lowest, most attractive rates toward the beginning. They guarantee the lower 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. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than the introductory low-rate period. ARMs can be risky if property values decrease and borrowers cannot sell their home or refinance their loan.

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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