Differences between adjustable and fixed loans
A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments on a fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount paid toward principal goes up slowly each month.
You can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more consistency 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 a favorable rate. Call Custom Lending Group at (707) 252-2700 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
The majority of ARMs are capped, so they won't increase over a specified amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can increase in a given period. In addition, almost all ARM programs feature a "lifetime cap" — this means that your rate won't go over the cap percentage.
ARMs most often feature their lowest rates toward the beginning. They guarantee that rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For 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 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who expect to move in three or five years. These types of ARMs benefit people who will move before the initial lock expires.
You might choose an ARM to get a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers can't 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!