Adjustable versus fixed loans
A fixed-rate loan features a fixed payment over the life of the loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on these types of loans vary little.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward your principal amount goes up gradually every month.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Custom Lending Group at (707) 252-2700 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest rates on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can increase in one period. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs most often have the lowest, most attractive rates toward the start of the loan. They usually provide that interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for people who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values decrease and borrowers can't sell 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!