Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment for the entire duration of your mortgage. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on these types of loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage goes to principal. The amount paid toward principal goes up gradually every month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Iltis Lending Group at (941) 954-4252 to learn more.

There are many different types of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages are capped, which means they can't increase above a specific amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in a given period. Most ARMs also cap your rate over the life of the loan.

ARMs usually start at a very low rate that may increase over time. 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 types of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are best for borrowers who expect to move within three or five years. These types of ARMs most benefit people who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values go down and borrowers can't sell their home or refinance their loan.

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