Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment amount over the life of the loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans vary little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. That reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to 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, come in many varieties. ARMs are generally adjusted every six months, based on various indexes.
The majority of 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 a couple percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment can't increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the initial lock expires.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the house longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell or refinance with a 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!