Adjustable versus fixed rate loans

With a fixed-rate loan, your payment never changes for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate mortgage will be very stable.

When you first take out a fixed-rate loan, most of your payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Iltis Lending Group at (941) 954-4252 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are generally adjusted every six months, based on various indexes.

The majority of ARMs feature this cap, so they can't increase above a specific amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple 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 monthly payment can go up in one period. In addition, almost all ARMs have a "lifetime cap" — the interest rate won't go over the capped amount.

ARMs usually start at a very low rate that usually increases over time. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for people who anticipate moving within three or five years. These types of ARMs are best for borrowers who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to get a very low introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (941) 954-4252. We answer questions about different types of loans every day.