Adjustable versus fixed loans

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A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount applied to principal increases up slowly each month.

You can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Mortgage Makers USA, Inc. at 561-447-9580 to learn more.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest for ARMs are based on an outside index. Some examples of outside indexes 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 programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in a given period. Plus, almost all ARM programs feature a "lifetime cap" — the rate will never exceed the capped amount.

ARMs most often feature the lowest rates at the start. They provide the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 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 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to remain in the house for any longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 561-447-9580. We answer questions about different types of loans every day.