Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment amount for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller part goes to principal. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this low 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 have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call Alternative Mortgage Group at 561-395-4264 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest on ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, so they won't go up above a specific amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in one period. Additionally, almost all adjustable programs feature a "lifetime cap" — your rate can never exceed the capped amount.
ARMs most often have the lowest, most attractive rates at the beginning of the loan. They guarantee that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values decrease and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at 561-395-4264. We answer questions about different types of loans every day.