Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment for the entire duration of your loan. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans vary little.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller percentage toward principal. The amount applied to your principal amount goes up gradually every month.
You can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Custom Lending Group at (707) 252-2700 to learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in one period. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers can't sell their home or refinance.
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!