Fixed versus adjustable loans
With a fixed-rate loan, your payment doesn't change for the life of your loan. The amount of the payment that goes to principal (the amount you borrowed) goes up, however, the amount you pay in interest will go down accordingly. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on these types of loans change little over the life of the loan.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage toward principal. This proportion reverses itself as the loan ages.
You can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), 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 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most ARMs feature this cap, so they won't go up over a specified amount in a given period of time. Some ARMs can't increase more than 2% 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 monthly payment can increase in a given period. Additionally, the great majority of ARMs have a "lifetime cap" — the interest rate can't exceed the cap amount.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory 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. These loans are often best for people who expect to move in three or five years. These types of ARMs most benefit people who plan to move before the loan adjusts.
You might choose an ARM to take advantage of a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers cannot sell 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!