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 portion that goes for principal (the amount you borrowed) increases, but the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts for a fixed-rate mortgage will increase very little.
When you first take out a fixed-rate mortgage loan, the majority the payment is applied to interest. This proportion gradually reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of 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 stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Alternative Mortgage Group at 561-395-4264 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they won't go up above a specific amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment won't increase beyond a certain amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs most often have the lowest, most attractive rates at the start of the loan. They guarantee that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to get a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell their home 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!