Fixed versus adjustable loans
A fixed-rate loan features the same payment over the life of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on these types of loans change little over the life of the loan.
At the beginning of a a fixed-rate mortgage loan, most of your payment is applied to interest. That gradually reverses itself as the loan ages.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Nationwide Home Loans at (562) 693-5048 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal index. Some examples of outside indexes 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.
The majority of ARMs are capped, so they won't increase above a certain amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment can't increase beyond a certain amount over the course of a given year. Most ARMs also cap your rate over the life of the loan period.
ARMs most often have the lowest, most attractive rates at the start of the loan. They usually guarantee the lower interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than the introductory low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at (562) 693-5048. We answer questions about different types of loans every day.