Differences between adjustable and fixed loans
With a fixed-rate loan, your payment remains the same for the entire duration of your mortgage. The portion of the payment that goes to your principal (the loan amount) goes up, however, your interest payment will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on these types of loans vary little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount applied to your principal amount increases up slowly each month.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, 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 for details.
There are many different types of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal 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 programs have a cap that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in a given period. In addition, almost all ARM programs feature a "lifetime cap" — your rate won't go over the capped percentage.
ARMs most often feature their lowest, most attractive rates toward the beginning of the loan. They provide the lower interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial 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 they adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. 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. We answer questions about different types of loans every day.