Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment remains the same for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments for a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Custom Lending Group at (707) 252-2700 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month 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 have a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment won't increase beyond a certain amount in a given year. Additionally, the great majority of adjustable programs have a "lifetime cap" — your interest rate can never exceed the cap amount.
ARMs most often have their lowest rates toward the start. They provide the lower interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate loans are best for people who plan to move before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on remaining in the home longer than the initial low-rate period. ARMs are risky when property values go down and borrowers are unable to 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!