Adjustable versus fixed rate loans
A fixed-rate loan features a fixed payment for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for your fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller part toward principal. That gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when 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 provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Mario Vega at 877-310-6200 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest on ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages feature this cap, so they won't increase over a certain 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 a couple percent per year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in one period. Additionally, the great majority of ARM programs feature a "lifetime cap" — this means that your rate can't ever go over the cap percentage.
ARMs most often have the lowest rates toward the beginning of the loan. They usually provide that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for people who will move before the loan adjusts.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on staying in the house for any longer than this initial low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell their home or refinance their loan.
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!