Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. 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 monthly payments on a fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, most of your payment pays interest, and a much smaller percentage toward principal. The amount applied to your principal amount goes up gradually each month.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. 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 Iltis Lending Group at (941) 954-4252 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can go up in one period. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs usually start out at a very low rate that usually increases over time. You may hear people talking 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 kinds of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the home longer than this introductory 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 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!