Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment remains the same for the entire duration of your mortgage. The amount of the payment that goes to principal (the amount you borrowed) will go up, however, your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments for a fixed-rate loan will be very stable.
When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. As you pay , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Pacific Loan Brokers at 877-310-6200 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. 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 Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, which means they can't go up above a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in a given period. Almost all ARMs also cap your interest rate over the life of the loan.
ARMs most often feature their lowest rates at the start. They usually provide the lower rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit people who will move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan to remain in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 877-310-6200. It's our job to answer these questions and many others, so we're happy to help!