Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The portion allocated for principal (the amount you borrowed) will increase, but the amount you pay in interest will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on fixed rate loans don't increase much.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage toward principal. This proportion reverses as the loan ages.
Borrowers 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 want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call My FL Home Loans, Inc. at (727) 743-1620 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs feature this cap, which means they can't increase over a certain amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in one period. Additionally, almost all ARMs feature a "lifetime cap" — this cap means that the rate can never go over the capped amount.
ARMs most often have the lowest, most attractive rates toward the start. They provide that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory 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 after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit people who will 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 count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at (727) 743-1620. It's our job to answer these questions and many others, so we're happy to help!