Differences between fixed and adjustable loans
A fixed-rate loan features the same payment amount for the entire duration of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. This proportion reverses as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Statewide Funding at (415) 456-7802 to learn more.
There are many kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month 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 feature a "cap" that protects you from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can increase in one period. The majority of ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have the lowest, most attractive rates toward the beginning of the loan. They provide the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a very low initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot sell their home or refinance with a lower property value.
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!