Fixed versus adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans change little over the life of the loan.
When you first take out a fixed-rate mortgage loan, the majority your payment is applied to interest. As you pay , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call The Reen Team at American Pacific Mortgage at (408) 626-1879 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs have a cap that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment will not increase beyond a fixed amount over the course of a given year. Most ARMs also cap your rate over the life of the loan.
ARMs most often feature the lowest rates at the start. They usually guarantee the lower interest rate from a month to ten years. You've probably read about 5/1 or 3/1 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 usually best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky if property values decrease and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at (408) 626-1879. It's our job to answer these questions and many others, so we're happy to help!