Adjustable versus fixed rate loans

 
A fixed-rate loan features a fixed payment of the principal and interest over the life of your loan. The property tax and homeowners insurance, which are almost always part of the payment (escrows), will most likely increase over time and, if the do, the payment will change to reflect those changes.
 

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller percentage toward principal. This proportion reverses as the loan ages.  Thus it is advantageous to pay additional payments to reduce the principal balance during the early years of the mortgage to shorten the total life of the loan. 

People choose fixed-rate loans because interest rates are low and they want to lock in the rate for the life of the loan. Call me, Sherry Bitner at 941-504-1445 or email me at Sherry@SherryBitner.com to learn more.

Adjustable Rate Mortgages — ARMs, as we call them — come in many varieties. Generally, interest for ARMs are determined by an Treasury Bill index. They have a range of being fixed for: 3, 5, 7 or 10 years.  

Most programs have a cap that protects you from sudden monthly payment increases when the loan adjusts.  There may be a cap on how much your interest rate can increase in one period.  For example: no more than a couple percent per adjustments, even though the underlying index increases by more than two percent.  Your loan may have a "payment cap" that instead of capping the interest directly, it caps the amount your monthly payment can increase in one period.  Plus, the great majority of adjustable programs have a "lifetime cap" — this means that your rate will never exceed the lifetime cap amount.

ARMs most often have the lowest rates toward the beginning. You may have heard about 3/1, 5/1, 7/1 or 10/1 ARMs. In these loans, the introductory rate is fixed for 3, 5, 7, or 10 years.  After this period, it adjusts every year, thus the /1.  These types of ARMs mostly benefit borrowers who know they will sell their house or refinance before the initial rate lock expires.  Other ARM's are 3/3, 5/5, etc.  Thus they will adjust at the end of every 3 or 5 years throughout the life of the loan.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up.  But, today's ARM's are priced about the same as a fixed rate, so why gamble?  ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell their home or refinance at the lower property value.  They can also be risky when you take a loan and anticipate an income increase that does not happen.  Fixed rates are always the best rate in a low rate market.  Generally, it is advisable not to buy into these types of loans if the interest rate is less than 10%.  You are only giving the lender a reason to increase your mortgage payment to meet their increase of income, not yours. 

If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability.  But, you need to do the math to see if it is worth paying the new additional closing costs are really worth it.  Especially if you have been paying extra principal payments each month.  I would suggest you give me a call to discuss whether it is worth while switching to a fixed-rate. Not all Loan Originators have your best interest in mind...they just have commission signs in their head. 

Are you a gambler or do you go for the sure thing?  This is your most expensive asset you will own, it is advisable to be on the safe side with this investment!