Fixed versus adjustable rate loans
With a fixed-rate loan, your payment stays the same for the entire duration of the loan. The amount allocated to your principal (the amount you borrowed) goes up, however, the amount you pay in interest will go down accordingly. The property taxes and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans don't increase much.
Early in a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller part goes to principal. As you pay , more of your payment goes toward principal.
You can 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 want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Norcal Capital Group, Inc at (650) 689-5684 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they can't go up above a specified amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in a given period. Plus, almost all ARMs have a "lifetime cap" — this means that the rate will never go over the capped percentage.
ARMs most often feature their lowest rates toward the start of the loan. They provide the lower interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In 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. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the home longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell 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!