Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment remains the same for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate loan will increase very little.
When you first take out a fixed-rate loan, most of your payment is applied to interest. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Strategic Home Loans, Inc. at (805) 496-7500 for details.
There are many kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. 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. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in one period. In addition, the great majority of ARMs feature a "lifetime cap" — your rate can't ever exceed the capped percentage.
ARMs most often feature their lowest rates at the start of the loan. They guarantee that rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 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 adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit people who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan on staying in the home for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (805) 496-7500. We answer questions about different types of loans every day.