Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment remains the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount paid toward your principal amount goes up gradually every month.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this 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 currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Halpern & Associates Mortgage Corporation at (305) 535-2230 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment can't go above a certain amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan.
ARMs usually start 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 introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit people who will move before the initial lock expires.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at (305) 535-2230. It's our job to answer these questions and many others, so we're happy to help!