Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment amount for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments on a fixed-rate mortgage will increase very little.

When you first take out a fixed-rate loan, most of your payment is applied to interest. The amount paid toward principal 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 because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Iltis Lending Group at (941) 954-4252 to discuss your situation with one of our professionals.

There are many kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, which means they won't go up above a certain amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment can't go above a fixed amount over the course of a given year. In addition, the great majority of ARM programs have a "lifetime cap" — the interest rate can never exceed the capped amount.

ARMs most often have the lowest, most attractive rates toward the beginning. They provide the lower interest 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 introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at (941) 954-4252. We answer questions about different types of loans every day.