Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment stays the same for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts for your fixed-rate loan will be very stable.
When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of 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 provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call AmeriBest Mortgage at (321) 777-7277 to discuss how we can help.
There are many different types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the underlying index increases 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 increase in one period. Additionally, the great majority of ARMs have a "lifetime cap" — the interest rate can't go over the capped amount.
ARMs most often have the lowest rates toward the beginning. They guarantee that rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to remain in the house longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (321) 777-7277. We answer questions about different types of loans every day.