Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the mortgage. The amount allocated to your principal (the actual loan amount) will increase, however, the amount you pay in interest will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on these types of loans change little over the life of the loan.
At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. The amount paid toward principal goes up gradually each month.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer 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 First Southeast Mortgage Corporation at 954.920.9799 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, which means they can't increase above a certain amount in a given period of time. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment can't go above a certain amount over the course of a given year. Additionally, almost all ARMs have a "lifetime cap" — your interest rate can't go over the cap percentage.
ARMs most often have their lowest rates toward the beginning of the loan. They provide that rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the house for any longer than the initial low-rate period. ARMs are risky when property values decrease and borrowers are unable to sell their home or refinance.
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!