Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The amount of the payment that goes to your principal (the loan amount) will increase, however, your interest payment will decrease in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments on a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. That reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love 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 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.
Most programs have a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment will not increase beyond a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for people who plan to move before the initial lock expires.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan on staying in the house for any longer than the initial low-rate period. ARMs can be risky if 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.