Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment remains the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on your fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount applied to principal goes up gradually each month.
You might choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call My FL Home Loans, Inc. at (727) 743-1620 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they can't go up over a certain amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can increase in a given period. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature the lowest rates toward the start of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the house for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (727) 743-1620. We answer questions about different types of loans every day.