Adjustable versus fixed rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. The property tax and homeowners insurance will go up over time, but in general, payments on fixed rate loans change little over the life of the loan.
At the beginning of a a fixed-rate loan, most of the payment is applied to interest. That gradually reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Bliss Mortgage LLC at 813-966-1888 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages feature this cap, so they can't go up above a certain amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment can't increase beyond a certain amount in a given year. The majority of ARMs also cap your rate over the duration of the loan.
ARMs usually start out at a very low rate that usually increases over time. You may have heard about "5/1 ARMs" or "7/1 ARMs" or "10/1 ARMs" and now "5/5 ARMs". For these loans, the introductory rate is fixed for five, seven, or ten years. It then adjusts every year or every five years. These kinds of loans are fixed for 5, 7, or 10 years, then they adjust. These loans are usually best for people who expect to move within seven to ten years, but may be a great option for longer based on the new smart features in today's ARMs. These types of adjustable rate programs benefit borrowers who will move before the initial lock expires or increases. Watch the video below for more information on our smart ARMs.
You might choose an ARM to get a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease and borrowers cannot sell or refinance their loan.
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!