Fixed versus adjustable rate loans
A fixed-rate loan features the same payment amount over the life of your loan. The property taxes and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans don't increase much.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage goes to principal. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low 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 monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call First Southeast Mortgage Corporation at 954.920.9799 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a cap that protects you from sudden increases in monthly payments. 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 go up in one period. In addition, almost all ARMs have a "lifetime cap" — the rate can't exceed the capped percentage.
ARMs most often feature the lowest, most attractive rates toward the start of the loan. They usually 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 introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who will move before the initial lock expires.
You might choose an ARM to take advantage of a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky if property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at 954.920.9799. We answer questions about different types of loans every day.