Fixed versus adjustable loans
With a fixed-rate loan, your payment stays the same for the entire duration of the mortgage. The portion that goes to principal (the amount you borrowed) increases, but your interest payment will go down 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 payments on your fixed-rate loan will increase very little.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. That gradually reverses as the loan ages.
You might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide 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 a favorable rate. Call Statewide Funding at (415) 456-7802 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest on ARMs are based on a federal index. A few of these are: the 6-month 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 increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment won't increase beyond a fixed amount in a given year. Most ARMs also cap your rate over the duration of the loan period.
ARMs most often feature their lowest rates at the start. They guarantee the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky when property values go down and borrowers cannot sell or refinance their loan.
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!