Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans don't increase much.

Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller percentage goes to principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Moneyline Mortgage, Inc. at 813-645-9004 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest rates on ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can increase in one period. The majority of ARMs also cap your rate over the duration of the loan.

ARMs most often have their lowest, most attractive rates at the beginning. They usually guarantee the lower interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the house longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell or refinance.