Differences between adjustable and fixed loans
A fixed-rate loan features the same payment amount over the life of your loan. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans vary little.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part goes to principal. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Standard Mortgage at 818-999-6444 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest rates for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs feature this cap, which means they won't go up above a specified amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in one period. The majority of ARMs also cap your rate over the life of the loan period.
ARMs most often have the lowest, most attractive rates toward the start of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 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 certain number of years (3 or 5), then they adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an ARM to get a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. 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 818-999-6444. It's our job to answer these questions and many others, so we're happy to help!