Differences between adjustable and fixed rate loans

With a fixed-rate loan, your payment doesn't change for the life of the loan. The portion allocated for your principal (the amount you borrowed) will increase, but 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 payments for a fixed-rate loan will increase very little.

When you first take out a fixed-rate loan, the majority the payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Trevor McLean
NMLS# 1619298 at 727-290-6863 for details.

There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most ARMs feature this cap, so they won't increase over a certain amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment won't go above a certain amount in a given year. Almost all ARMs also cap your rate over the life of the loan.

ARMs usually start out at a very low rate that usually increases as the loan ages. 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 types of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to get a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 727-290-6863. We answer questions about different types of loans every day.