Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment stays the same for the life of your mortgage. The portion allocated for principal (the actual loan amount) will go up, but your interest payment will go down in the same amount. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.
At the beginning of a a fixed-rate loan, most of the payment goes toward interest. The amount applied to your principal amount increases up slowly every month.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish 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 monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call First Southeast Mortgage Corporation at 954.920.9799 for details.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust 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 your payment can increase in a given period. The majority of ARMs also cap your rate over the life of the loan period.
ARMs most often feature their lowest, most attractive rates at the start. They usually provide the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial 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. These loans are often best for people who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan on remaining in the home longer than the introductory low-rate period. ARMs can be risky if property values decrease and borrowers can't sell 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!