Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment amount over the life of your loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller percentage goes to principal. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (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 a good rate. Call The Reen Team at American Pacific Mortgage at (408) 626-1879 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs feature a "cap" that protects you 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" which guarantees your payment can't increase beyond a certain amount in a given year. Additionally, almost all ARM programs have a "lifetime cap" — your interest rate won't exceed the capped amount.
ARMs most often have their lowest rates toward the beginning of the loan. They guarantee that rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of ARMs are best for people who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the home longer than this introductory low-rate period. ARMs can be risky if property values go down and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at (408) 626-1879. We answer questions about different types of loans every day.