Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on fixed rate loans don't increase much.
At the beginning of a a fixed-rate loan, most of your payment is applied to interest. The amount applied to principal goes up gradually every month.
You might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Dick Lepre at (415) 244-9383 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARMs are capped, which means they can't increase over a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can go up in one period. In addition, almost all ARMs feature a "lifetime cap" — your interest rate won't go over the cap percentage.
ARMs usually start out 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 introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (415) 244-9383. We answer questions about different types of loans every day.