Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The portion of the payment allocated for principal (the amount you borrowed) goes up, however, the amount you pay in interest will decrease in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Statewide Funding at (415) 456-7802 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they can't increase above a specified amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment will not increase beyond a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan.
ARMs most often have their lowest rates toward the start. They usually provide that rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit people who plan to move before the initial lock expires.
You might choose an ARM to take advantage of a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values go down 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!