Adjustable versus fixed rate loans
A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments for a fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a significantly smaller percentage toward principal. The amount paid toward principal increases up gradually every month.
You might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call AmeriBest Mortgage at (321) 777-7277 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment won't increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature the lowest, most attractive rates toward the start. They usually guarantee that rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers are unable to sell or refinance their loan.
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!