Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on these types of loans vary little.
When you first take out a fixed-rate loan, the majority the payment is applied to interest. This proportion gradually reverses as the loan ages.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability 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 a good rate. Call Integrity Lending at 941-924-0044 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.
Most programs have a "cap" that protects borrowers from sudden increases in monthly payments. 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 underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can go up in a given period. In addition, almost all ARMs feature a "lifetime cap" — the interest rate can't ever exceed the cap percentage.
ARMs most often have the lowest rates at the beginning of the loan. They provide the lower rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who plan to move before the initial lock expires.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to remain in the home longer than the initial low-rate period. ARMs are risky if property values go down and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at 941-924-0044. We answer questions about different types of loans every day.