Differences between adjustable and fixed loans

A fixed-rate loan features the same payment for the entire duration of the loan. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.

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

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call First Community Bank of Central Al. at (334) 285-8850 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment will not increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.

ARMs most often feature their lowest, most attractive rates at the start. They guarantee the lower rate for an initial period that varies greatly. 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 loans are fixed for 3 or 5 years, then adjust. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who will move before the initial lock expires.

Most people who choose ARMs do so when they want to get lower introductory rates and do not plan on staying in the home longer than this introductory low-rate period. ARMs can be risky when property values go down and borrowers can't sell 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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