Differences between fixed and adjustable rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments on a fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate loan, most of your payment is applied to interest. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call The Reen Team at American Pacific Mortgage at (408) 626-1879 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment will not go above a fixed amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates toward the start. They guarantee the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory 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. Loans like this are usually best for people who expect to move in three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to remain in the home for any longer than this initial low-rate period. ARMs can be risky when property values decrease and borrowers can't sell their home 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!