Adjustable versus fixed rate loans
A fixed-rate loan features a fixed payment amount for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans don't increase much.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part toward principal. The amount applied to principal goes up slowly every month.
You 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 the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Town & Country Home Loans, Inc. at (760)789-9995 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of 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 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in one period. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs most often have their lowest, most attractive rates at the beginning of the loan. They guarantee the lower rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. These loans are best for people who expect to move within three or five years. These types of ARMs are best for people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to remain in the house longer than this initial low-rate period. ARMs can be risky if property values go down and borrowers can't sell their home or refinance.