Differences between adjustable and fixed loans
A fixed-rate loan features the same payment amount for the entire duration of the mortgage. 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 on a fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People 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 more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to 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.
There are many kinds of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages are capped, which means they can't go up above a specified 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 index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. Plus, almost all ARM programs feature a "lifetime cap" — your interest rate can never exceed the cap percentage.
ARMs most often have their lowest rates at the beginning. They usually guarantee that rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on remaining in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell or refinance at the lower property value.