Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment remains the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.
When you first take out a fixed-rate loan, the majority the payment goes toward interest. This proportion reverses as the loan ages.
You might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Strategic Home Loans, Inc. at (805) 496-7500 for details.
There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment will not go above a fixed amount in a given year. Plus, the great majority of ARMs feature a "lifetime cap" — this cap means that your rate can't ever exceed the capped amount.
ARMs most often have the lowest, most attractive rates at the start. They provide that interest rate from a month to ten years. 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 after the initial period. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the house longer than this introductory low-rate period. ARMs are risky when property values decrease and borrowers are unable to sell or refinance their loan.
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!