Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The amount that goes for your principal (the actual loan amount) increases, but your interest payment will go down in the same amount. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage toward principal. That gradually reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call Norcal Capital Group, Inc at 6507631924 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest rates on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in a given period. The majority of ARMs also cap your rate over the life of the loan.
ARMs most often have their lowest rates at the beginning of the loan. They usually provide the lower interest rate for an initial period that varies greatly. 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 they adjust. These loans are often best for borrowers who expect to move within three or five years. These types of ARMs benefit borrowers who will move before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to stay in the house for any longer than this introductory low-rate period. ARMs can be risky if property values decrease and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at 6507631924. We answer questions about different types of loans every day.