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 will increase over time, but in general, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Strategic Home Loans, Inc. at (805) 496-7500 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust twice a year, based on various indexes.
Most ARMs are capped, so they can't go up above a specific amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can increase in a given period. Almost all ARMs also cap your interest rate over the life of the loan.
ARMs most often have the lowest rates at the beginning of the loan. They usually guarantee that rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed 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. Loans like this are best for borrowers who expect to move within three or five years. These types of ARMs are best for people who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan to stay in the home longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell their home 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.