Adjustable versus fixed loans
A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate loan, the majority the payment is applied to interest. The amount applied to your principal amount increases up slowly each month.
You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call First Southeast Mortgage Corporation at 954.920.9799 to learn more.
There are many types of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by an outside index. A few of these 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 ARMs feature this cap, which means they won't go up above a specific amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment can't increase beyond a certain amount in a given year. Almost all ARMs also cap your rate over the life of the loan.
ARMs usually start out at a very low rate that usually increases over time. 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 loans are fixed for a number of years (3 or 5), then adjust. Loans like this are best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who will move before the loan adjusts.
Most people who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the home longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell their home or refinance with a lower property value.
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!