Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment stays the same for the life of your loan. The amount of the payment allocated to principal (the loan amount) will increase, however, the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments for a fixed-rate mortgage will increase very little.
When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. That gradually reverses as the loan ages.
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 wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call First Southeast Mortgage Corporation at 954.920.9799 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, which means they won't increase over a certain amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can increase in a given period. In addition, the great majority of adjustable programs feature a "lifetime cap" — your interest rate can't exceed the cap percentage.
ARMs most often feature the lowest rates toward the start of the loan. They guarantee that interest rate for an initial period that varies greatly. 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. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the house longer than the initial low-rate period. ARMs are risky if property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 954.920.9799. It's our job to answer these questions and many others, so we're happy to help!