Differences between fixed and adjustable loans
With a fixed-rate loan, your payment stays the same for the entire duration of the 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 be very stable.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part goes to principal. As you pay on the loan, more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan in order 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. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call Custom Lending Group at (707) 252-2700 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, which means they won't increase over a specific amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment won't increase beyond a fixed amount in a given year. Additionally, the great majority of adjustable programs have a "lifetime cap" — this cap means that your rate won't exceed the capped amount.
ARMs most often have the lowest rates toward the beginning of the loan. They guarantee that interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so 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 if property values go down and borrowers are unable to sell their home or refinance their loan.
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!