Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The portion that goes for principal (the amount you borrowed) increases, however, your interest payment will decrease in the same amount. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.
Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage toward principal. That reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call The Reen Team at American Pacific Mortgage at (408) 626-1879 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs have a cap that protects you from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even if the index the rate is based on increases 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 one period. In addition, almost all adjustable programs feature a "lifetime cap" — this cap means that the interest rate won't go over the capped percentage.
ARMs usually start 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 set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers cannot sell their home or refinance.
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!