Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment stays the same for the life of your loan. The portion allocated to your principal (the actual loan amount) increases, however, your interest payment will go down in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate mortgage loan, most of the payment goes toward interest. This proportion gradually reverses as the loan ages.
Borrowers can 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 low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Norcal Capital Group, Inc at 6507631924 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates on ARMs are based on an outside index. Some examples of outside indexes 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 programs feature a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent a 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 your monthly payment can increase in a given period. Plus, almost all ARMs have a "lifetime cap" — the rate can't go over the capped amount.
ARMs usually start at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of ARMs most benefit borrowers who plan to move before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the house for any longer than this initial low-rate period. ARMs can be 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 6507631924. We answer questions about different types of loans every day.