Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The amount allocated to principal (the loan amount) increases, but the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on your fixed-rate loan will increase very little.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage goes to principal. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Norcal Capital Group, Inc at 6507631924 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust every six months, based on various indexes.
Most ARMs are capped, so they can't go up above a specified amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment can't go above a certain amount over the course of a given year. Plus, almost all adjustable programs have a "lifetime cap" — this means that your interest rate will never go over the capped percentage.
ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are often best for people who expect to move in three or five years. These types of ARMs benefit borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on staying in the home longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 6507631924. We answer questions about different types of loans every day.