Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage goes to principal. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate 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 into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call AmeriBest Mortgage at (321) 777-7277 to learn more.
There are many different types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can go up in a given period. Almost all ARMs also cap your interest rate over the life of the loan.
ARMs most often have the lowest rates at the start of the loan. They provide that 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 set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (321) 777-7277. It's our job to answer these questions and many others, so we're happy to help!