Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans vary little.
Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage goes to principal. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, 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. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs have a cap that protects you from sudden monthly payment increases. Some ARMs can't adjust 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 your monthly payment can increase in a given period. Additionally, almost all ARM programs feature a "lifetime cap" — your interest rate can't exceed the capped amount.
ARMs most often feature their lowest, most attractive rates at the start of the loan. They provide that 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 initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to get a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 6507631924. We answer questions about different types of loans every day.