Fixed versus adjustable rate loans
With a fixed-rate loan, your payment stays the same for the life 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 your insurance rates might vary as well. But generally monthly payments on a fixed-rate loan will be very stable.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part goes to principal. The amount paid toward your principal amount goes up slowly each month.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), 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 how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in one period. In addition, the great majority of ARMs have a "lifetime cap" — your interest rate can never go over the cap amount.
ARMs usually start at a very low rate that usually increases over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 561-395-4264. We answer questions about different types of loans every day.