Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment remains the same for the entire duration of the mortgage. The portion that goes to principal (the amount you borrowed) will go up, however, your interest payment will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller percentage goes to principal. That gradually reverses itself as the loan ages.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Budica Financial Corporation at (951)840-4188 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in a given period. Most ARMs also cap your interest rate over the life of the loan.
ARMs most often feature their lowest rates at the start. They usually guarantee the lower rate for an initial period that varies greatly. 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 loans are fixed for 3 or 5 years, 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 benefit borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan on remaining in the house longer than the initial 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.