Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The amount of the payment allocated to principal (the actual loan amount) will go up, however, your interest payment will decrease in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts for a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. That gradually reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call AmeriBest Mortgage at (321) 777-7277 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
The majority of ARMs are capped, which means they can't increase above a certain amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment can't go above a certain amount over the course of a given year. Plus, the great majority of adjustable programs feature a "lifetime cap" — this cap means that your interest rate won't go over the capped amount.
ARMs usually start at a very low rate that may increase over time. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who will 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 when property values go down and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (321) 777-7277. We answer questions about different types of loans every day.