Adjustable versus fixed loans
With a fixed-rate loan, your payment never changes for the life of your mortgage. The amount that goes to your principal (the loan amount) will go up, however, the amount you pay in interest will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on these types of loans change little over the life of the loan.
When you first take out a fixed-rate loan, most of the payment is applied to interest. The amount paid toward your principal amount goes up slowly every month.
You can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Town & Country Home Loans, Inc. at (760)789-9995 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust every six months, based on various indexes.
Most programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment can't increase beyond a certain amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates toward the start. They provide that interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are usually best for borrowers who expect to move within three or five years. These types of ARMs are best for borrowers who will move before the loan adjusts.
You might choose an ARM to get a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell their home or refinance at the lower property value.