Fixed versus adjustable loans
A fixed-rate loan features the same payment amount for the entire duration of the loan. The property taxes and homeowners insurance will go up over time, but generally, payments on fixed rate loans vary little.
When you first take out a fixed-rate loan, most of the payment is applied to interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call Lighthouse Mortgage Company at (916) 434-8915 to learn more.
There are many types of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by a federal 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 ARM programs have a cap that protects you from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment won't go above a fixed amount over the course of a given year. Almost all ARMs also cap your interest rate over the life of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (916) 434-8915. It's our job to answer these questions and many others, so we're happy to help!