Adjustable versus fixed loans

A fixed-rate loan features the same payment over the life of the loan. The property tax and homeowners insurance will increase over time, but in general, payments on these types of loans change little over the life of the loan.

At the beginning of a a fixed-rate mortgage loan, the majority the payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Alternative Mortgage Group at 561-395-4264 to learn more.

There are many different kinds of Adjustable Rate Mortgages. ARMs are normally 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 how much your interest rate can go up in one period. For example: no more than a couple percent a year, even if 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 the monthly payment can go up in a given period. Plus, almost all ARMs have a "lifetime cap" — this cap means that the rate will never exceed the capped amount.

ARMs most often feature their lowest rates at the start of the loan. They provide the lower rate for an initial period that varies greatly. 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. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on remaining in the home for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be 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!


Alternative Mortgage Group

80 SW 14 Ave
Boca Raton, FL 33486