Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. This proportion gradually reverses itself as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they want 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'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 your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages feature this cap, so they can't increase over a specific amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment will not increase beyond a certain amount in a given year. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs most often have their lowest rates at the start of the loan. They guarantee that rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust. These loans are usually best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who plan to move before the loan adjusts.
You might choose an ARM to take advantage of a very low initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values go down and borrowers can't sell or refinance.
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!