Differences between fixed and adjustable loans
A fixed-rate loan features the same payment amount over the life of your mortgage. The property taxes and homeowners insurance will go up over time, but in general, payments on fixed rate loans don't increase much.
At the beginning of a a fixed-rate loan, most of the payment is applied to interest. This proportion reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Strategic Home Loans, Inc. at (805) 496-7500 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, so they can't go up over a certain amount in a given period of time. 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 though 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 rate directly, caps the amount that your monthly payment can go up in one period. The majority of ARMs also cap your rate over the duration of the loan.
ARMs most often have their lowest, most attractive rates toward the start of the loan. They guarantee that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners could be stuck with rates that go up 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.