Adjustable versus fixed loans

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With a fixed-rate loan, your payment never changes for the entire duration of the loan. The amount of the payment that goes to your principal (the actual loan amount) will increase, however, your interest payment will go down in the same amount. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on these types of loans don't increase much.

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part goes to principal. As you pay , more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call Cason Home Loans at 863-286-4824 to learn more.

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

The majority of ARMs feature this cap, so they won't go up above a certain amount in a given period. Some ARMs won't increase 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 that the payment can increase in one period. Plus, almost all ARMs feature a "lifetime cap" — this means that your interest rate can't ever go over the capped percentage.

ARMs usually start at a very low rate that usually increases over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it 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 ARMs most benefit borrowers who will move before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 863-286-4824. It's our job to answer these questions and many others, so we're happy to help!

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