Differences between fixed and adjustable loans
A fixed-rate loan features a fixed payment amount over the life of your loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans vary little.
When you first take out a fixed-rate loan, the majority the payment goes toward interest. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater 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 a good rate. Call Lighthouse Mortgage Company at (916) 434-8915 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages feature this cap, so they won't increase above a certain amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple 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 rate directly, caps the amount that the monthly payment can increase in one period. The majority of ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates toward the start of the loan. They usually provide that rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are best for people who expect to move within three or five years. These types of ARMs benefit borrowers who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on staying in the home longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (916) 434-8915. We answer questions about different types of loans every day.