Fixed versus adjustable loans
With a fixed-rate loan, your payment stays the same for the life of your loan. The amount of the payment allocated for your principal (the loan amount) will increase, but your interest payment will go down in the same amount. The property tax and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans vary little.
At the beginning of a a fixed-rate loan, most of the payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because 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 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 the best rate currently available. Call Custom Lending Group at (707) 252-2700 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages are capped, which means they won't increase over a certain amount in a given period of time. Some ARMs can't adjust 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 payment can increase in one period. Most ARMs also cap your rate over the life of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for people who will move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the house longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell their home 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!