Differences between fixed and adjustable loans
With a fixed-rate loan, your payment remains the same for the life of your mortgage. The amount of the payment that goes for your principal (the actual loan amount) will go up, but the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments on your fixed-rate loan will increase very little.
At the beginning of a a fixed-rate mortgage loan, the majority your payment is applied to interest. This proportion reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Iltis Lending Group at (941) 954-4252 to learn more.
There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most ARMs are capped, so they can't increase above a certain amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment can't go above a certain amount in a given year. Most ARMs also cap your rate over the duration of the loan.
ARMs most often have their lowest rates toward the beginning. They usually provide the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 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. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to stay in the house for any longer than the initial low-rate period. ARMs are risky when property values decrease and borrowers are unable to sell or refinance.
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!