Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the life of your mortgage. The portion that goes to principal (the loan amount) goes up, but the amount you pay in interest will decrease in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for a fixed-rate loan will be very stable.
Early in a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller part toward principal. The amount paid toward principal increases up slowly each month.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with 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 the best rate currently available. Call Lighthouse Mortgage Company at (916) 434-8915 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in a given period. Additionally, almost all ARM programs feature a "lifetime cap" — the rate can't exceed the capped percentage.
ARMs most often feature their lowest rates at the beginning of the loan. They provide the lower rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who expect to move in three or five years. These types of ARMs are best for borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease 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.