Differences between adjustable and fixed loans
A fixed-rate loan features the same 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 payments for your fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage goes to principal. That reverses as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Town & Country Home Loans, Inc. at (760)789-9995 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects you from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment will not increase beyond a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often have the lowest, most attractive rates toward the beginning. They usually provide that interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In 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 often best for people who anticipate moving in three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so because they want to get lower introductory rates and do not plan on remaining in the house longer than the initial low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell their home or refinance their loan.