Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on these types of loans vary 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 paid toward your principal amount goes up gradually each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call First Community Bank of Central Al. at (334) 285-8850 for details.

There are many types of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in one period. The majority of ARMs also cap your rate over the life of the loan.

ARMs most often feature their lowest, most attractive rates at the start of the loan. They usually provide the lower rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on remaining 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 increasing rates if they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at (334) 285-8850. We answer questions about different types of loans every day.

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