Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment amount over the life of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans vary little.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller percentage toward principal. The amount applied to principal goes up slowly each month.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater 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 the best rate currently available. Call Strategic Home Loans, Inc. at (805) 496-7500 to learn more.
There are many different types 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. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment can't go above a certain amount over the course of a given year. The majority of ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate loans 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 remain in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell their home or refinance at the lower property value.
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!