Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment stays the same for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on these types of loans vary little.
When you first take out a fixed-rate loan, most of your payment is applied to interest. This proportion gradually reverses as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in the 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 can assist you in locking a fixed-rate at a good rate. Call AmeriBest Mortgage at (321) 777-7277 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest on ARMs are based on an outside 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.
The majority of ARMs feature this cap, so they won't increase over a specific amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment will not go above a certain amount in a given year. Plus, almost all ARM programs feature a "lifetime cap" — your rate can never exceed the capped percentage.
ARMs usually start out at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to remain in the house longer than the introductory low-rate period. ARMs are risky if property values go down and borrowers are unable to 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!