Adjustable versus fixed loans
With a fixed-rate loan, your payment never changes for the life of your loan. The portion of the payment that goes to your principal (the actual loan amount) increases, however, the amount you pay in interest will go down accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts for a fixed-rate mortgage will be very stable.
When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. That reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more 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 for details.
There are many different 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, so they can't go up above a certain amount in a given period of time. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment will not go above a fixed amount in a given year. Most ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial 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. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit people who plan to move before the loan adjusts.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to stay in the house longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell or refinance at the 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!