Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The amount that goes for principal (the loan amount) will increase, however, the amount you pay in interest will decrease in the same amount. The property tax and homeowners insurance will increase over time, but generally, payment amounts on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage toward principal. The amount paid toward principal increases up slowly each month.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Refresh Funding at 305-800-3863 to learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in a given period. Most ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature their lowest rates at the start. They provide that rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of ARMs are best for people who plan to move before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 305-800-3863. We answer questions about different types of loans every day.