Fixed versus adjustable rate loans

With a fixed-rate loan, your payment doesn't change for the life of the mortgage. The portion allocated to principal (the amount you borrowed) increases, but your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts for your fixed-rate mortgage will be very stable.

When you first take out a fixed-rate loan, the majority your payment goes toward interest. This proportion gradually reverses itself as the loan ages.

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 wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency 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 for details.

There are many types of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (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 ARM programs have a "cap" that protects you from sudden increases in monthly payments. 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 though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment can't increase beyond a fixed amount over the course of a given year. Most ARMs also cap your rate over the life of the loan.

ARMs most often have the lowest rates toward the start. They usually guarantee the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of ARMs most benefit people who plan to move before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on staying in the home for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot 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!