Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for your fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate loan, the majority your payment goes toward interest. The amount paid toward principal goes up slowly each month.

You can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate 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 provide more consistency in monthly payments. 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 First Community Bank of Central Al. at (334) 285-8850 for details.

There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most ARMs feature this cap, so they won't go up above a specified amount in a given period of time. 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 though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment can't increase beyond a fixed amount over the course of a given year. Additionally, almost all ARM programs feature a "lifetime cap" — the interest rate will never go over the cap amount.

ARMs usually start at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell 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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