Adjustable versus fixed loans
A fixed-rate loan features the same payment amount over the life of the loan. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay on the loan, more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Norcal Capital Group, Inc at 6507631924 to discuss how we can help.
There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment won't increase beyond a certain amount in a given year. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs most often have their lowest, most attractive rates toward the beginning. They usually guarantee the lower interest rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are usually best for borrowers who expect to move in three or five years. These types of ARMs are best for people who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot 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!