Fixed versus adjustable loans
With a fixed-rate loan, your payment never changes for the entire duration of your loan. The portion of the payment that goes to your principal (the amount you borrowed) increases, however, the amount you pay in interest will go down accordingly. 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.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage toward principal. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call New Millennium Mortgage Co. NMLS: 331173 at (941) 366-5800 for details.
There are many different kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 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. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment will not increase beyond a fixed amount in a given year. In addition, the great majority of ARMs have a "lifetime cap" — this means that the rate can't go over the cap amount.
ARMs most often have their lowest, most attractive rates toward the beginning. They guarantee that rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they 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 most benefit people who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky if property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (941) 366-5800. It's our job to answer these questions and many others, so we're happy to help!