Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The portion of the payment that goes to principal (the loan amount) goes up, however, your interest payment will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments on a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount paid toward your principal amount increases up slowly every month.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. 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 Marc Moser / NMLS# 232625 / Licensed in Florida at 727-466-4301 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust every six months, based on various indexes.
Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in one period. In addition, almost all ARMs feature a "lifetime cap" — this means that the interest rate will never exceed the cap amount.
ARMs most often have the lowest, most attractive rates toward the beginning. They guarantee the lower rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who will move before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan to stay in the house longer than the introductory low-rate period. ARMs can be risky in a down market 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 727-466-4301. We answer questions about different types of loans every day.