Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount paid toward principal goes up slowly each month.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency 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 favorable rate. Call Alternative Mortgage Group at 561-395-4264 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
The majority of ARMs feature this cap, which means they won't go up above a specific amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in one period. In addition, the great majority of ARM programs have a "lifetime cap" — this means that your interest rate can't ever exceed the capped amount.
ARMs usually start out at a very low rate that usually increases over time. You may hear people talking 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 certain number of years (3 or 5), then adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of ARMs benefit people who plan to move before the initial lock expires.
You might choose an ARM to take advantage of a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 561-395-4264. It's our job to answer these questions and many others, so we're happy to help!