Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of your mortgage. The portion of the payment allocated for your principal (the loan amount) goes up, but the amount you pay in interest will decrease accordingly. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on these types of loans don't increase much.
Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage toward principal. The amount applied to your principal amount increases up slowly each month.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Custom Lending Group at (707) 252-2700 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most ARMs are capped, which means they can't increase over a specific amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment won't increase beyond a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the duration 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". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan on staying in the home for any longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at (707) 252-2700. We answer questions about different types of loans every day.