Differences between adjustable and fixed loans
With a fixed-rate loan, your payment never changes for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers 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 wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can 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.
There are many types of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages feature this cap, so they won't go up over a specific amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment can't increase beyond a certain amount over the course of a given year. The majority of ARMs also cap your rate over the duration of the loan.
ARMs usually start out at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan to remain in the house longer than the initial low-rate period. ARMs are risky when property values go down and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at (805) 496-7500. We answer questions about different types of loans every day.