Fixed versus adjustable loans
With a fixed-rate loan, your payment stays the same for the life of the loan. The portion that goes for your principal (the loan amount) will go up, but your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments on your fixed-rate loan will increase very little.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller percentage goes to principal. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call America's Money Source at (407) 898-7559 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment will not increase beyond a certain amount over the course of a given year. Additionally, almost all ARM programs have a "lifetime cap" — your interest rate won't exceed the capped amount.
ARMs most often have the lowest rates at the start of the loan. They usually provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are usually best for borrowers who expect to move in 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 do so when they want to get lower introductory rates and do not plan to remain in the home for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (407) 898-7559. We answer questions about different types of loans every day.
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