Differences between adjustable and fixed loans
With a fixed-rate loan, your payment never changes for the life of your mortgage. The portion of the payment that goes for your principal (the amount you borrowed) will increase, however, your interest payment will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. That reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Statewide Funding at (415) 456-7802 to learn more.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most programs feature a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in a given period. Plus, almost all adjustable programs feature a "lifetime cap" — your interest rate won't exceed the cap amount.
ARMs usually start out at a very low rate that may increase as the loan ages. You've likely heard of 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 types of loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at (415) 456-7802. We answer questions about different types of loans every day.