Fixed versus adjustable loans

A fixed-rate loan features a fixed payment amount over the life of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love 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 to learn more.

There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

Most ARMs are capped, so they won't increase above a specified amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in a given period. The majority of ARMs also cap your interest rate over the life of the loan.

ARMs most often have their lowest rates at the beginning of the loan. They provide that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers 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 count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky if property values go down and borrowers can't sell or refinance.

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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