Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment never changes for the entire duration 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 payments for a fixed-rate mortgage will be very stable.
When you first take out a fixed-rate loan, most of your payment is applied to interest. The amount paid toward your principal amount goes up slowly each month.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (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 help you lock in a fixed-rate at a good rate. Call Dick Lepre at (415) 244-9383 to discuss your situation with one of our professionals.
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 ARM programs have a cap that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment will not go above a fixed amount over the course of a given year. Plus, the great majority of ARM programs feature a "lifetime cap" — your rate won't go over the capped amount.
ARMs most often feature the lowest rates at the start. They usually provide the lower interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are often best for people who expect to move within three or five years. These types of ARMs are best for borrowers who will move before the initial lock expires.
You might choose an ARM to get a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory 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 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.