Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. 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 your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount paid toward principal goes up gradually each month.
You might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Alternative Mortgage Group at 561-395-4264 for details.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they can't increase over a specified amount in a given period of time. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment will not go above a certain amount over the course of a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — your rate can't ever exceed the cap amount.
ARMs usually start at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory 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 usually best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the house for any longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers are unable to sell or refinance their loan.
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!