Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly 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 increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate loan will increase very little.
During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a much smaller part toward principal. The amount applied to principal goes up slowly each month.
You can 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 want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, 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 your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. 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 if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in a given period. The majority of ARMs also cap your rate over the life of the loan period.
ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the house for any longer than this introductory low-rate period. ARMs are risky when property values decrease and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at (415) 456-7802. We answer questions about different types of loans every day.