Differences between adjustable and fixed rate loans
With a fixed-rate loan, your 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 tax and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount applied to your principal amount increases up slowly each month.
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 want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in 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 kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most ARM programs feature a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in one period. The majority of ARMs also cap your rate over the life of the loan.
ARMs most often feature their lowest, most attractive rates at the start. They guarantee that rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 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 certain number of years (3 or 5), then they adjust. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home 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.