Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed-rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount paid toward your principal amount goes up gradually each month.

You might choose a fixed-rate loan to lock in a low-interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more 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 a favorable rate. Call American Fidelity at 813-766-5149 to discuss how we can help.

There are many different types of Adjustable Rate Mortgages. Generally, the interest 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 ARM programs have a "cap" that protects you from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment won't increase beyond a certain amount in a given year. In addition, almost all ARMs have a "lifetime cap" — your rate can never exceed the capped amount.

ARMs usually start at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the home longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell or refinance at the lower property value.