Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The portion of the payment allocated to principal (the loan amount) will increase, but the amount you pay in interest will go down accordingly. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans change little over the life of the loan.
When you first take out a fixed-rate mortgage loan, the majority your payment is applied to interest. The amount applied to principal increases up gradually each month.
You might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Contemporary Mortgage Services, Inc at 407-834-3377 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are normally adjusted twice a year, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment won't increase beyond a certain amount in a given year. Plus, the great majority of ARMs have a "lifetime cap" — this cap means that your rate won't go over the cap percentage.
ARMs usually start at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan to remain in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 407-834-3377. 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?