Differences between adjustable and fixed loans
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A fixed-rate loan features the same payment amount for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate loan will increase very little.
During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a significantly smaller part goes to principal. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Inter-Capital Group at (408) 985-6400 for details.
There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. 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 if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment won't increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your rate over the life of the loan.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 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. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to stay in the house longer than the initial low-rate period. ARMs are risky if property values decrease and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at (408) 985-6400. It's our job to answer these questions and many others, so we're happy to help!