Differences between adjustable and fixed loans

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

Early in a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller part toward principal. This proportion reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Gulf States Financial at (205) 588-0672 to discuss your situation with one of our professionals.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages feature this cap, which means they can't go up over a specified amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. 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 directly, caps the amount the payment can go up in a given period. Most ARMs also cap your interest rate over the life of the loan.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial 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 usually best for borrowers who expect to move within three or five years. These types of ARMs are best for people who will move before the loan adjusts.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on remaining in the home for any longer than this initial low-rate period. ARMs are risky if property values go down and borrowers can't sell or refinance their loan.

Have questions about mortgage loans? Call us at (205) 588-0672. We answer questions about different types of loans every day.