Fixed versus adjustable rate loans

A fixed-rate loan features the same payment for the entire duration of the mortgage. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans vary little.

Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage goes to principal. This proportion gradually reverses itself as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater 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 a favorable rate. Call Secured Horizon Financial Group, Inc at (305) 891-6500 to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.

Most ARMs are capped, so they can't increase above a certain amount in a given period of time. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment will not increase beyond a certain amount in a given year. The majority of ARMs also cap your rate over the duration of the loan period.

ARMs most often feature the lowest, most attractive rates at the start of the loan. They usually provide the lower interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In 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 borrowers who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the house for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell or refinance at the lower property value.