Adjustable versus fixed rate loans

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

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part toward principal. This proportion gradually reverses as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, 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 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.

Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs can'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 directly, caps the amount the payment can go up in a given period. Plus, the great majority of ARM programs feature a "lifetime cap" — this means that the interest rate can never exceed the capped percentage.

ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the loan adjusts.

You might choose an ARM to get a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values go down and borrowers can't sell or refinance.

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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