Adjustable versus fixed rate loans
A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments on a fixed-rate loan will increase very little.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part goes to principal. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call AmeriBest Mortgage at (321) 777-7277 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they won't go up above a specific amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment can't increase beyond a fixed amount over the course of a given year. Plus, almost all ARM programs feature a "lifetime cap" — this means that your interest rate will never go over the cap amount.
ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.
You might choose an ARM to get a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (321) 777-7277. We answer questions about different types of loans every day.