Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts for a fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. That reverses as the loan ages.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Quick Quote Mortgage Inc NMLS #388278 at (813) 657-2427 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, interest rates for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, 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 monthly payment increases. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment won't increase beyond a certain amount in a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky when property values decrease and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (813) 657-2427. It's our job to answer these questions and many others, so we're happy to help!