Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The amount of the payment that goes for your principal (the amount you borrowed) will go up, however, the amount you pay in interest will go down accordingly. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part toward principal. As you pay on the loan, more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in the low 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 have an Adjustable Rate Mortgage (ARM) now, we'll be glad 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 types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most programs feature a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment can't increase beyond a certain amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that may increase over time. You've likely heard of 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 a number of years (3 or 5), then they adjust. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate loans benefit people who plan to move before the initial lock expires.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to remain in the home for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (707) 252-2700. We answer questions about different types of loans every day.