Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for your fixed-rate loan will increase very little.
When you first take out a fixed-rate loan, most of your payment is applied to interest. That gradually reverses itself as the loan ages.
You might choose a fixed-rate loan to lock in a low rate. People choose these types of 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 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 Statewide Funding at (415) 456-7802 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, 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 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 underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment won't increase beyond a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature their lowest, most attractive rates toward the beginning. They usually guarantee the lower rate from a month to ten years. You've probably read about 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 often best for people who expect to move within three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to remain in the home longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (415) 456-7802. We answer questions about different types of loans every day.