Differences between fixed and adjustable loans
A fixed-rate loan features the same payment amount for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments for a fixed-rate loan will increase very little.
At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. As you pay , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call First Southeast Mortgage Corporation at 954.920.9799 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest for ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, so they won't increase over a certain amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees that your payment will not increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature their lowest rates toward the start. They usually guarantee that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell 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!