Adjustable versus fixed loans
A fixed-rate loan features a fixed payment amount over the life of the loan. The property tax and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans vary little.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage goes to principal. This proportion reverses as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency 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 My FL Home Loans, Inc. at (727) 743-1620 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, which means they can't increase over a certain amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in a given period. Almost all ARMs also cap your rate over the life of the loan.
ARMs most often feature their lowest, most attractive rates toward the start of the loan. They provide that 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 set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values decrease and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (727) 743-1620. We answer questions about different types of loans every day.