Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment doesn't change for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but in general, payment amounts on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Lighthouse Mortgage Company at (916) 434-8915 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, so they won't go up above a certain amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in a given period. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature the lowest, most attractive rates toward the beginning. They usually provide the lower rate from a month to ten years. You may hear people talking 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 types of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who will move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values decrease and borrowers can't sell or refinance their loan.
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!