Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment over the life of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on your fixed-rate loan will be very stable.

When you first take out a fixed-rate loan, the majority your payment is applied to interest. The amount applied to principal increases up gradually every month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency 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 the best rate currently available. Call Iltis Lending Group at (941) 954-4252 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in a given period. The majority of ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of ARMs are best for people who plan to move before the initial lock expires.

You might choose an ARM to get a lower initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky if property values decrease and borrowers cannot sell 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.