Fixed versus adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of your mortgage. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on fixed rate loans vary little.
When you first take out a fixed-rate loan, most of the payment goes toward interest. That gradually reverses as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Strategic Home Loans, Inc. at (805) 496-7500 to learn more.
There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are based on 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.
Most ARM programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in one period. Plus, the great majority of adjustable programs have a "lifetime cap" — this means that your rate can't ever exceed the capped percentage.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are usually best for people who expect to move in 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 take advantage of a very low introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values decrease and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at (805) 496-7500. We answer questions about different types of loans every day.