Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment over the life of your loan. The property tax and homeowners insurance will go up over time, but in general, payment amounts on these types of loans change little over the life of the loan.
When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call AmeriBest Mortgage at (321) 777-7277 to learn more.
There are many types of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, which means they won't increase above a specified amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment will not increase beyond a fixed amount over the course of a given year. The majority of ARMs also cap your rate over the life of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed 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 adjust. Loans like this are best for borrowers who expect to move within three or five years. These types of ARMs benefit people who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values go down and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at (321) 777-7277. We answer questions about different types of loans every day.