Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment for the entire duration of your mortgage. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller percentage toward principal. The amount applied to principal goes up slowly every month.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call My FL Home Loans, Inc. at (727) 743-1620 for details.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs feature a cap that protects you from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment can't go above a certain amount over the course of a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — your interest rate can't exceed the capped amount.
ARMs most often feature the lowest rates at the start of the loan. They usually provide that rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who plan to move before the loan adjusts.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to stay in the home longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell or refinance at the lower property value.
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!