Adjustable versus fixed rate loans
A fixed-rate loan features a fixed payment amount over the life of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments for your fixed-rate loan will increase very little.
At the beginning of a a fixed-rate loan, most of the payment is applied to interest. The amount paid toward principal increases up slowly each month.
You might choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in at the 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'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Nationwide Home Loans at (562) 693-5048 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs feature a cap that protects you from sudden monthly payment increases. 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. Sometimes an ARM has a "payment cap" that guarantees that your payment can't increase beyond a fixed amount in a given year. Plus, almost all adjustable programs feature a "lifetime cap" — your rate can't ever go over the capped percentage.
ARMs usually start at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans benefit people who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on staying in the home longer than this introductory low-rate period. ARMs are risky when property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (562) 693-5048. It's our job to answer these questions and many others, so we're happy to help!