Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments for a fixed-rate loan will increase very little.
When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a good rate. Call Norcal Capital Group, Inc at (650) 689-5684 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your payment can increase in a given period. Plus, the great majority of ARMs have a "lifetime cap" — this means that the interest rate won't exceed the cap amount.
ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan to remain in the home longer than the introductory low-rate period. ARMs can be risky if property values go down and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at (650) 689-5684. We answer questions about different types of loans every day.