Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment never changes for the life of your mortgage. The amount of the payment allocated to your principal (the loan amount) will increase, however, the amount you pay in interest will decrease accordingly. The property tax and homeowners insurance will increase over time, but generally, payments on these types of loans change little over the life of the loan.
When you first take out a fixed-rate loan, the majority your payment is applied to interest. The amount applied to principal increases up gradually each month.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Norcal Capital Group, Inc at 6507631924 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in a given period. Most ARMs also cap your rate over the duration of the loan period.
ARMs most often feature the lowest rates toward the start of the loan. They guarantee that interest rate for an initial period that varies greatly. 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. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 6507631924. It's our job to answer these questions and many others, so we're happy to help!