Adjustable versus fixed rate loans
With a fixed-rate loan, your payment doesn't change for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments on a fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, most of your payment pays interest, and a significantly smaller part goes to principal. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at the low 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'd love to assist you in locking a fixed-rate at a favorable rate. Call Iltis Lending Group at (941) 954-4252 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can increase in a given period. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set 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. These loans are usually best for borrowers who anticipate moving in three or five years. These types of ARMs benefit borrowers who will move before the initial lock expires.
Most people who choose ARMs do so because they want to get lower introductory rates and don't plan to stay in the home for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (941) 954-4252. It's our job to answer these questions and many others, so we're happy to help!