Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment amount over the life of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts for your fixed-rate loan will increase very little.
Early in a fixed-rate loan, most of your payment goes toward interest, and a much smaller percentage toward principal. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Dick Lepre at (415) 244-9383 for details.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
The majority of ARMs feature this cap, so they won't increase over a certain amount in a given period. Some ARMs can't adjust 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 the payment can increase in one period. In addition, the great majority of ARMs have a "lifetime cap" — your rate will never exceed the capped amount.
ARMs most often feature the lowest, most attractive rates at the start. They usually guarantee the lower interest rate from a month to ten years. You may hear people talking 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 adjust. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who plan to move 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 house longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (415) 244-9383. We answer questions about different types of loans every day.