Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments for a fixed-rate mortgage will increase very little.

Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller percentage toward principal. The amount applied to principal increases up slowly each month.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a good rate. Call Strock & Tanner Mortgage Corp. at 305-598-1600 for details.

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

Most 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 increase in one period. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can increase in one period. Most ARMs also cap your interest rate over the duration of the loan period.

ARMs most often have their lowest rates at the start of the loan. They usually guarantee that rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For 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 they adjust after the initial period. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan on staying in the house longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell or refinance with a lower property value.