Differences between fixed and adjustable loans

With a fixed-rate loan, your payment doesn't change for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part toward principal. This proportion reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call U.S.A. Lending, Inc. at 305-967-7200 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment will not increase beyond a fixed amount over the course of a given year. In addition, almost all ARM programs have a "lifetime cap" — this means that your interest rate can't exceed the capped percentage.

ARMs usually start at a very low rate that usually increases over time. You've probably heard of 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 types of loans are fixed for a number of years (3 or 5), then adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 305-967-7200. We answer questions about different types of loans every day.