Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment stays the same for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.
At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. That gradually reverses itself as the loan ages.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because 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 greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Norma Moreno-Squier at 6023326989 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest rates for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, 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 over a specific amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment will not increase beyond a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs most often feature the lowest rates at the beginning of the loan. They usually provide the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan on remaining in the house longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 6023326989. It's our job to answer these questions and many others, so we're happy to help!