Adjustable versus fixed loans
A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments on your fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. As you pay , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Custom Lending Group at (707) 252-2700 for details.
There are many kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment will not increase beyond a certain amount over the course of a given year. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates at the beginning of the loan. They guarantee that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory rate and plan 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 could be stuck with increasing rates if they can't sell their home or refinance with a 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!