Fixed versus adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans vary little.
At the beginning of a a fixed-rate loan, most of the payment is applied to interest. The amount applied to your principal amount increases up gradually each month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call The Reen Team at American Pacific Mortgage at (408) 626-1879 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARMs are capped, which means they can't increase above a certain amount in a given period of time. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment can't increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs most often feature the lowest rates toward the start. They guarantee that interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for borrowers who anticipate moving within three or five years. These types of ARMs are best for borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values decrease and borrowers can't sell or refinance.
Have questions about mortgage loans? Call us at (408) 626-1879. We answer questions about different types of loans every day.