Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. The amount that goes for principal (the actual loan amount) will increase, however, your interest payment will go down in the same amount. The property tax and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. The amount applied to your principal amount 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 want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more 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 your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust every six months, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, so they can't increase above a specific amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment won't increase beyond a fixed amount in a given year. In addition, the great majority of ARMs have a "lifetime cap" — this cap means that your interest rate won't go over the cap percentage.
ARMs most often feature the lowest rates at the start. They usually provide the lower rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit people who will move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at 6507631924. We answer questions about different types of loans every day.