Adjustable versus fixed rate loans
A fixed-rate loan features the same payment over the life of your loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. That gradually reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because 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'd love to assist you in locking a fixed-rate at a favorable rate. Call Greystone Loans, Inc. at (909) 467-1090 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't go above a fixed amount in a given year. Plus, almost all ARMs have a "lifetime cap" — this cap means that your interest rate will never go over the capped amount.
ARMs most often have the lowest rates toward the beginning. They usually guarantee that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to stay in the home for any longer than the initial low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell or refinance.