Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The amount of the payment allocated for your principal (the actual loan amount) will go up, however, the amount you pay in interest will go down in the same amount. The property tax and homeowners insurance will increase over time, but in general, payment amounts on these types of loans don't increase much.
Early in a fixed-rate loan, most of your payment pays interest, and a much smaller percentage toward principal. That reverses as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call America's Money Source at (407) 898-7559 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in one period. Plus, the great majority of ARMs feature a "lifetime cap" — the interest rate can't ever go over the cap amount.
ARMs usually start out at a very low rate that usually increases over time. 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. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for people who expect to move within three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the loan adjusts.
You might choose an ARM to get a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values go down and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (407) 898-7559. It's our job to answer these questions and many others, so we're happy to help!
Do you have a question regarding a mortgage program?