Adjustable versus fixed rate loans
A fixed-rate loan features a fixed payment over the life of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. That gradually reverses itself as the loan ages.
You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call My FL Home Loans, Inc. at (727) 743-1620 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment can't increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs most often have their lowest rates at the beginning. They usually guarantee that interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In 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 they adjust. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for people who plan to move before the initial lock expires.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than this initial low-rate period. ARMs are risky when property values go down and borrowers can't sell their home or refinance their loan.
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!