Fixed versus adjustable rate loans
With a fixed-rate loan, your payment remains the same for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for a fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part toward principal. The amount paid toward principal increases up slowly each month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, 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 learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they won't go up over a certain amount in a given period. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in a given period. In addition, almost all ARM programs have a "lifetime cap" — this cap means that the interest rate will never go over the cap percentage.
ARMs most often have their lowest rates at the start. They usually provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the initial lock expires.
You might choose an ARM to take advantage of a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they cannot sell or refinance at the 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!