Differences between fixed and adjustable loans
With a fixed-rate loan, your payment remains the same for the life of the mortgage. The amount that goes to your principal (the loan amount) will increase, however, the amount you pay in interest will go down in the same amount. The property tax and homeowners insurance will increase over time, but in general, payment amounts on these types of loans vary little.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part toward principal. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Statewide Funding at (415) 456-7802 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. 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 index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in one period. In addition, almost all adjustable programs have a "lifetime cap" — this means that the interest rate won't go over the capped percentage.
ARMs most often have their lowest, most attractive rates toward the start. They usually provide that interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of 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 in three or five years. These types of adjustable rate programs most benefit people who will move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to remain in the house longer than this introductory low-rate period. ARMs are risky when property values decrease and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (415) 456-7802. It's our job to answer these questions and many others, so we're happy to help!