Differences between adjustable and fixed rate loans

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With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The amount allocated to your principal (the loan amount) will go up, however, the amount you pay in interest will go down in the same amount. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.

At the beginning of a a fixed-rate mortgage loan, most of your payment is applied to interest. As you pay , more of your payment is applied to principal.

You can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call Florida State Mortgage Group, Inc. at 954-359-3000 to learn more.

There are many kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month 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 have a cap that protects you from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment will not increase beyond a fixed amount over the course of a given year. Additionally, almost all ARMs have a "lifetime cap" — this means that the interest rate won't exceed the cap amount.

ARMs most often feature the lowest rates toward the start. They guarantee that rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For 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 a number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 954-359-3000. We answer questions about different types of loans every day.