Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment for the entire duration of your loan. The property taxes and homeowners insurance will increase over time, but generally, payment amounts on fixed rate loans vary little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. That reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Lighthouse Mortgage Company at (916) 434-8915 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in one period. Most ARMs also cap your rate over the duration of the loan.
ARMs most often have the lowest, most attractive rates at the start. They usually provide the lower interest rate for an initial period that varies greatly. 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 3 or 5 years, then adjust. Loans like this are best for people who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the house longer than the introductory low-rate period. ARMs are risky when property values go down and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at (916) 434-8915. We answer questions about different types of loans every day.