Differences between fixed and adjustable loans
A fixed-rate loan features the same payment for the entire duration of the loan. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more 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 learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted every six months, based on various indexes.
Most programs have a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can go up 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. Sometimes an ARM has a "payment cap" that 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 rate won't exceed the cap amount.
ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed 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 after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who will move before the loan adjusts.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell their home or refinance with a 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!