Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment stays the same for the entire duration of the mortgage. The amount of the payment allocated to principal (the amount you borrowed) will increase, but the amount you pay in interest will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for your fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage toward principal. The amount applied to principal increases up gradually every month.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call First Southeast Mortgage Corporation at 954.920.9799 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest for ARMs are determined by an outside index. Some examples of outside indexes 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 ARMs are capped, so they can't go up above a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures that your payment won't increase beyond a certain amount in a given year. Plus, the great majority of adjustable programs have a "lifetime cap" — this means that the rate won't go over the cap amount.
ARMs most often have their lowest rates toward the beginning. They provide that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will sell their house or refinance 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 stay in the home for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 954.920.9799. We answer questions about different types of loans every day.