Fixed versus adjustable loans

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

Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller percentage goes to principal. The amount paid toward your principal amount increases up gradually each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more 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 Leading Edge Mortgage Corp. at 561-392-0040 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in one period. In addition, almost all adjustable programs feature a "lifetime cap" — your interest rate can't ever go over the cap percentage.

ARMs usually start at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to stay in the house longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell or refinance at the lower property value.