Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment never changes for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Strategic Home Loans, Inc. at (805) 496-7500 to discuss your situation with one of our professionals.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs feature this cap, which means they can't go up above a specified amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment will not increase beyond a fixed amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs benefit borrowers who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky if property values go down and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at (805) 496-7500. It's our job to answer these questions and many others, so we're happy to help!