Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The portion that goes for your principal (the loan amount) will go up, however, the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts for your fixed-rate loan will be very stable.
When you first take out a fixed-rate mortgage loan, the majority the payment is applied to interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose 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 greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call AmeriBest Mortgage at (321) 777-7277 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are normally adjusted every six months, based on various indexes.
Most ARMs are capped, so they won't increase over a certain amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in a given period. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs usually start at a very low rate that may increase over time. You may hear people talking 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 loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.
You might choose an ARM to get a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (321) 777-7277. We answer questions about different types of loans every day.