Fixed versus adjustable loans

A fixed-rate loan features a fixed payment over the life of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments on a fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay on the loan, more of your payment is applied to principal.

You might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Iltis Lending Group at (941) 954-4252 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, interest rates for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the 1 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 borrowers from sudden monthly payment increases. Your ARM may feature 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. Sometimes an ARM has a "payment cap" which guarantees your payment won't increase beyond a fixed amount over the course of a given year. In addition, almost all ARMs have a "lifetime cap" — the rate won't go over the cap percentage.

ARMs most often feature the lowest rates at the beginning. They provide the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. These loans are best for people who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the loan adjusts.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to stay in the house for any longer than this initial low-rate period. ARMs can be risky when property values go down 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!