Differences between adjustable and fixed rate loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of the mortgage. The portion allocated to principal (the actual loan amount) will increase, however, your interest payment will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on a fixed-rate mortgage will increase very little.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller part goes to principal. This proportion gradually reverses itself as the loan ages.

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 at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Alternative Mortgage Group at 561-395-4264 to discuss your situation with one of our professionals.

There are many different types of Adjustable Rate Mortgages. Generally, interest rates for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages feature this cap, so they won't go up above a specified amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment will not go above a fixed amount over the course of a given year. Additionally, the great majority of ARM programs have a "lifetime cap" — the rate can never go over the capped percentage.

ARMs most often have their lowest, most attractive rates toward the beginning. They provide that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are usually best for people who anticipate moving within three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so 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 if property values go down and borrowers can't sell or refinance their loan.

Have questions about mortgage loans? Call us at 561-395-4264. We answer questions about different types of loans every day.