Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans don't increase much.
When you first take out a fixed-rate loan, the majority your payment is applied to interest. The amount paid toward your principal amount increases up slowly every month.
Borrowers might 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 lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Pacific Mortgage Consultants at 530-677-2703 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted twice a year, based on various indexes.
Most ARM programs have a cap that protects you from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment won't increase beyond a certain amount over the course of a given year. Plus, almost all ARMs have a "lifetime cap" — this cap means that the rate won't exceed the capped percentage.
ARMs usually start out at a very low rate that usually increases as the loan ages. 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 types of loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of ARMs benefit people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the home longer than this initial low-rate period. ARMs are risky if property values go down and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 530-677-2703. We answer questions about different types of loans every day.