Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for a fixed-rate mortgage will be very stable.
When you first take out a fixed-rate loan, the majority your payment is applied to interest. This proportion reverses itself as the loan ages.
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 low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad 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 kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. 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 though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in one period. Almost all ARMs also cap your rate over the life of the loan.
ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for people who expect to move within three or five years. These types of adjustable rate loans are best for borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the home longer than this introductory low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell their home 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!