Differences between adjustable and fixed rate loans
With a fixed-rate loan, your payment stays the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount applied to principal goes up gradually each month.
You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Town & Country Home Loans, Inc. at (760)789-9995 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
The majority of ARMs feature this cap, so they won't go up over a specific amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can go up in one period. Plus, almost all adjustable programs have a "lifetime cap" — your rate can't ever exceed the capped amount.
ARMs most often feature their lowest, most attractive rates at the start of the loan. They guarantee that interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell their home or refinance at the lower property value.