Fixed versus adjustable rate loans
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With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The portion of the payment allocated for your principal (the actual loan amount) increases, however, the amount you pay in interest will decrease accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay on the loan, more of your payment is applied to principal.
You might 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 wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Preston Ware at (561) 329-0075 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, 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 can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment will not increase beyond a certain amount in a given year. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates at the start. They usually provide that rate from a month to ten years. You've probably heard of 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 a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of ARMs most benefit people who will move before the initial lock expires.
You might choose an ARM to get a very low initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (561) 329-0075. It's our job to answer these questions and many others, so we're happy to help!