Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate loan will increase very little.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage toward principal. The amount paid toward your principal amount increases up gradually each month.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Nationwide Home Loans at (562) 693-5048 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most programs feature a "cap" that protects you from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't increase beyond a fixed amount over the course of a given year. The majority of ARMs also cap your rate over the life of the loan period.
ARMs usually start at a very low rate that usually increases over time. 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 a number of years (3 or 5), then adjust after the initial period. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (562) 693-5048. We answer questions about different types of loans every day.