Fixed versus adjustable rate loans
With a fixed-rate loan, your payment remains the same for the life of the mortgage. The amount that goes for your principal (the amount you borrowed) will go up, but your interest payment will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.
When you first take out a fixed-rate loan, the majority your payment goes toward interest. This proportion gradually reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Custom Lending Group at (707) 252-2700 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust every six months, based on various indexes.
Most ARM programs have 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 features a "payment cap" which guarantees that your payment won't go above a certain amount in a given year. Most ARMs also cap your interest rate over the life of the loan.
ARMs most often feature the lowest rates at the start of the loan. They usually guarantee the lower rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the home for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (707) 252-2700. It's our job to answer these questions and many others, so we're happy to help!