Adjustable versus fixed loans
With a fixed-rate loan, your payment never changes for the entire duration of your loan. The amount of the payment allocated to principal (the actual loan amount) goes up, but your interest payment will go down in the same amount. The property tax and homeowners insurance will go up over time, but in general, payments on these types of loans don't increase much.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage goes to principal. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater 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 the best rate currently available. Call Iltis Lending Group at (941) 954-4252 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are normally adjusted every six months, based on various indexes.
Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs most often have their lowest, most attractive rates at the beginning. They guarantee the lower rate from a month to ten years. You've probably read about 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 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 best for borrowers who anticipate moving in three or five years. These types of ARMs benefit borrowers who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the home longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (941) 954-4252. We answer questions about different types of loans every day.