Adjustable versus fixed loans
With a fixed-rate loan, your payment never changes for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. That reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low rate. People choose these types of loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater 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 AmeriBest Mortgage at (321) 777-7277 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can go up in one period. In addition, almost all adjustable programs have a "lifetime cap" — the rate can't ever go over the cap percentage.
ARMs most often feature their lowest, most attractive rates toward the start of the loan. They guarantee the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. These loans are usually best for people who anticipate moving within three or five years. These types of ARMs are best for borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than the initial low-rate period. ARMs are risky when property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (321) 777-7277. It's our job to answer these questions and many others, so we're happy to help!