Adjustable versus fixed loans
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A fixed-rate loan features the same payment over the life of your mortgage. The property tax and homeowners insurance will increase over time, but in general, payments on fixed rate loans change little over the life of the loan.
When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. This proportion reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in 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 Bliss Mortgage LLC at 813-966-1888 to learn more.
There are many different types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs are capped, which means they can't go up above a certain amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can go up in a given period. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs most often feature the lowest rates at the beginning. They usually provide that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the initial lock expires.
You might choose an ARM to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 813-966-1888. It's our job to answer these questions and many others, so we're happy to help!