Adjustable versus fixed loans
A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability 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 to discuss your situation with one of our professionals.
There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment can't increase beyond a fixed amount over the course of a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — this cap means that the rate can never go over the capped percentage.
ARMs most often have their lowest, most attractive rates toward the start of the loan. They usually 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". For these loans, the initial 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 after the initial period. These loans are best for borrowers who expect to move in three or five years. These types of ARMs benefit people who will sell their house or refinance before the initial lock expires.
You might choose an ARM to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values go down and borrowers are unable to sell or refinance.
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!