Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The portion of the payment allocated for principal (the amount you borrowed) goes up, but your interest payment will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount applied to your principal amount goes up slowly each month.
You might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in 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.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they won'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 features a "payment cap" which guarantees your payment will not go above a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature the lowest, most attractive rates toward the start of the loan. They provide the lower interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who will move before the loan adjusts.
You might choose an ARM to get a very low initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (805) 496-7500. We answer questions about different types of loans every day.