Fixed versus adjustable rate loans
A fixed-rate loan features the same payment over the life of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Norcal Capital Group, Inc at 6507631924 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest rates for ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs are capped, so they can't increase above a specified amount in a given period. Some ARMs won'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 go up in one period. In addition, almost all ARMs have a "lifetime cap" — the rate can't ever exceed the cap percentage.
ARMs usually start at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial 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 after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans 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 very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values go down and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 6507631924. We answer questions about different types of loans every day.