Differences between adjustable and fixed rate loans
Shopping for a mortgage loan? We'd be thrilled to talk about our many mortgage solutions! Call us at (415) 244-9383. Want to get started? Apply Now
A fixed-rate loan features the same payment over the life of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments for your fixed-rate loan will increase very little.
At the beginning of a a fixed-rate mortgage loan, most of your payment is applied to interest. The amount applied to principal goes up slowly every month.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Dick Lepre at (415) 244-9383 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, which means they won't increase above a certain amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment will not go above a certain amount over the course of a given year. In addition, almost all ARMs feature a "lifetime cap" — this cap means that the rate can't ever go over the cap percentage.
ARMs most often feature their lowest rates at the start. They usually provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who anticipate moving in three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an ARM to get a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (415) 244-9383. It's our job to answer these questions and many others, so we're happy to help!