Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of the loan. The amount that goes to your principal (the actual loan amount) increases, however, your interest payment will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an 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 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. Generally, interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. 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 though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment won't increase beyond a certain amount in a given year. Plus, the great majority of ARM programs have a "lifetime cap" — this cap means that the rate can never exceed the capped amount.
ARMs most often feature the lowest rates at the start of the loan. They provide that rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (415) 244-9383. We answer questions about different types of loans every day.