Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment for the entire duration of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up 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 payment goes toward interest, and a much smaller part toward principal. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Town & Country Home Loans, Inc. at (760)789-9995 to learn more.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most ARMs are capped, so they won't go up over a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can increase in one period. The majority of ARMs also cap your interest rate over the duration of the loan.
ARMs most often have their lowest rates toward the start of the loan. They guarantee that rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who plan to move before the initial lock expires.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on staying in the home longer than this introductory low-rate period. ARMs can be risky if property values go down and borrowers can't sell their home or refinance their loan.