Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment remains the same for the life of your mortgage. The portion of the payment allocated to your principal (the amount you borrowed) will increase, but the amount you pay in interest will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on these types of loans vary little.
Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount applied to your principal amount increases up slowly each month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of 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 into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. 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 usually adjust twice a year, based on various indexes.
The majority of ARMs feature this cap, which means they can't increase above a certain amount in a given period of time. Your ARM may feature 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 increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment won't increase beyond a fixed amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan.
ARMs most often have their lowest rates toward the start. They usually provide that rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set 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. These loans are usually best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on remaining in the home longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell 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!