Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment amount for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.

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

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when 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 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 a favorable rate. Call Iltis Lending Group at (941) 954-4252 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, so they can't go up over a specified amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment will not increase beyond a certain amount in a given year. The majority of ARMs also cap your rate over the life of the loan period.

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

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan on remaining in the home for any longer than this initial low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell or refinance.

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