Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts for your fixed-rate mortgage will be very stable.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part goes to principal. The amount applied to your principal amount goes up slowly every month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Homewood Mortgage, Inc. at 205-941-1484 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest rates for ARMs are determined by a federal index. A few of these are: the 6-month 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 are capped, so they can't increase over a specified amount in a given period. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your payment can increase in a given period. Almost all ARMs also cap your interest rate over the life of the loan period.

ARMs most often have their lowest rates toward the beginning. They usually provide the lower interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for people who anticipate moving within three or five years. These types of ARMs are best for people who will move before the initial lock expires.

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

Have questions about mortgage loans? Call us at 205-941-1484. It's our job to answer these questions and many others, so we're happy to help!

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