Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans don't increase much.

During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a much smaller percentage goes to principal. The amount applied to your principal amount increases up gradually each month.

Borrowers can choose a fixed-rate loan in order 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 into a fixed-rate loan can offer 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 good rate. Call Saltwater Funding, Inc. at 386-246-6322 for details.

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

Most ARM programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment can't go above a certain amount over the course of a given year. Additionally, almost all ARMs have a "lifetime cap" — the interest rate won't go over the cap amount.

ARMs usually start out at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are usually best for people who expect to move in three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan on remaining in the house for any longer than this introductory low-rate period. ARMs can be risky if property values decrease and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at 386-246-6322. We answer questions about different types of loans every day.

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