Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments for your fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount applied to principal increases up slowly each month.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Norcal Capital Group, Inc at 6507631924 to learn more.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment won't increase beyond a fixed amount in a given year. Most 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 have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who will move before the loan adjusts.
You might choose an ARM to take advantage of a very low introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky if property values go down and borrowers can't sell or refinance.
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!