Differences between fixed and adjustable loans
With a fixed-rate loan, your payment doesn't change for the life of the loan. The portion of the payment allocated to your principal (the amount you borrowed) goes up, but your interest payment will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage goes to principal. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to 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.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they won't increase over a specified amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment won't go above a fixed amount over the course of a given year. Plus, the great majority of adjustable programs feature a "lifetime cap" — this means that your rate can't ever exceed the capped percentage.
ARMs usually start out at a very low rate that usually increases as the loan ages. 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 kinds of loans are fixed for 3 or 5 years, then adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to stay in the home longer than this initial low-rate period. ARMs are risky if property values decrease and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at (727) 743-1620. We answer questions about different types of loans every day.