Differences between adjustable and fixed loans

With a fixed-rate loan, your payment stays the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but generally, payment amounts on these types of loans don't increase much.

At the beginning of a a fixed-rate loan, most of the payment is applied to interest. The amount applied to principal goes up gradually every month.

You might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love 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, come in even more varieties. Generally, the interest rates for ARMs are based on a federal index. Some examples of outside indexes 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.

The majority of Adjustable Rate Mortgages feature this cap, which means they can't go up over a certain amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your payment can increase in a given period. Almost all ARMs also cap your rate over the duration of the loan period.

ARMs usually start out 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 fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of ARMs are best for borrowers who plan to move before the initial lock expires.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the home for any longer than the introductory low-rate period. ARMs are risky if property values go down and borrowers are unable to 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.