Adjustable versus fixed rate loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward your principal amount goes up slowly each month.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Halpern & Associates Mortgage Corporation at (305) 535-2230 to discuss your situation with one of our professionals.

There are many different types of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on an outside index. Some examples of outside indexes 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 monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in one period. Plus, the great majority of ARMs have a "lifetime cap" — this cap means that your interest rate can never exceed the capped amount.

ARMs usually start out at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who will move before the loan adjusts.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (305) 535-2230. It's our job to answer these questions and many others, so we're happy to help!

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