Fixed versus adjustable loans
With a fixed-rate loan, your payment doesn't change for the life of your loan. The amount of the payment allocated for principal (the loan amount) goes up, however, the amount you pay in interest will go down in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts for your fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage goes to principal. This proportion gradually reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. 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 learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment will not increase beyond a fixed amount in a given year. In addition, almost all adjustable programs feature a "lifetime cap" — this cap means that the rate won't go over the capped amount.
ARMs most often have the lowest rates toward the beginning. They usually guarantee the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs are best for people who will move before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the home longer than the initial 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 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!