Differences between adjustable and fixed loans
With a fixed-rate loan, your payment remains the same for the life of your loan. The portion of the payment that goes to principal (the actual loan amount) will go up, but the amount you pay in interest will go down accordingly. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Alternative Mortgage Group at 561-395-4264 to learn more.
There are many types of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages are capped, so they won't increase above a specific amount in a given period of time. Your ARM may feature 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. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in one period. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs most often have the lowest rates toward the beginning. They usually guarantee the lower rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers are unable to 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.