Fixed versus adjustable rate loans
With a fixed-rate loan, your payment stays the same for the entire duration of the loan. 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. But generally payments on your fixed-rate loan will increase very little.
Early in a fixed-rate loan, most of your payment pays interest, and a significantly smaller percentage toward principal. The amount applied to principal goes up slowly every month.
Borrowers might choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. 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 Adjustable Rate Mortgages are capped, so they can't go up over a specified amount in a given period. Some ARMs can't adjust more than two percent 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 monthly payment can go up in a given period. The majority of ARMs also cap your rate over the life of the loan period.
ARMs most often feature the lowest, most attractive rates toward the beginning of the loan. They usually provide the lower rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who anticipate moving within three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (650) 689-5684. It's our job to answer these questions and many others, so we're happy to help!