Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments on your fixed-rate loan will be very stable.
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.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Alternative Mortgage Group at 561-395-4264 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
The majority of ARMs feature this cap, which means they can't go up over a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in a given period. In addition, the great majority of adjustable programs have a "lifetime cap" — this means that the interest rate can't ever go over the cap amount.
ARMs most often feature their lowest, most attractive rates toward the start of the loan. They provide the lower interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit people who will move before the loan adjusts.
You might choose an ARM to take advantage of a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if 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!