Fixed versus adjustable rate loans
With a fixed-rate loan, your payment stays the same for the entire duration of the mortgage. The amount that goes to your principal (the loan amount) increases, however, your interest payment will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans don't increase much.
When you first take out a fixed-rate loan, the majority the payment goes toward interest. This proportion gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in 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 twice a year, based on various indexes.
Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can increase in one period. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that may increase over time. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to remain in the house for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell their home or refinance at the 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!