Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment over the life of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate mortgage will be very stable.

During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part toward principal. That reverses as the loan ages.

You might 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 the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in 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.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are normally adjusted twice a year, based on various indexes.

The majority of ARMs feature this cap, which means they can't go up over a specific amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment will not go above a certain amount over the course of a given year. In addition, almost all ARMs have a "lifetime cap" — your rate won't exceed the cap amount.

ARMs usually start at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 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 a number of years (3 or 5), then adjust. Loans like this are best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for people who plan to move before the initial lock expires.

Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the house longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell their home 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!