Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment stays the same for the life of your mortgage. The amount of the payment allocated for your principal (the actual loan amount) will increase, however, your interest payment will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans vary little.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller part toward principal. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish 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 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.
There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
The majority of ARMs feature this cap, which means they can't increase over a specific amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can increase in one period. In addition, the great majority of adjustable programs have a "lifetime cap" — the interest rate won't go over the capped percentage.
ARMs usually start out at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of ARMs are best for people who will move before the initial lock expires.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on staying in the house for any longer than the initial low-rate period. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance.
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!