Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Norcal Capital Group, Inc at 6507631924 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust every six months, based on various indexes.
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 two percent a year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in one period. Almost all ARMs also cap your rate over the life of the loan.
ARMs usually start at a very low rate that may increase over time. 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. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan to remain in the home for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 6507631924. It's our job to answer these questions and many others, so we're happy to help!