Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment doesn't change for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on your fixed-rate loan will increase very little.
At the beginning of a a fixed-rate loan, the majority your payment is applied to interest. As you pay on the loan, more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to 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, come in many varieties. Generally, interest for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, which means they can't go up over a specified 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" that guarantees that your payment will not increase beyond a fixed amount in a given year. Additionally, the great majority of adjustable programs have a "lifetime cap" — your interest rate can't exceed the capped percentage.
ARMs most often have their lowest, most attractive rates toward the beginning. They guarantee the lower interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will move before the initial lock expires.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than this introductory low-rate period. ARMs are risky when property values decrease and borrowers can't sell or refinance.
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!