Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment amount over the life of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts for a fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. That gradually reverses itself as the loan ages.
You might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer 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 Greystone Loans, Inc. at (909) 467-1090 to learn more.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest on ARMs are determined by 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.
Most ARMs are capped, so they won't increase over a specified amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment can't increase beyond a fixed amount over the course of a given year. Additionally, almost all ARMs have a "lifetime cap" — this cap means that your rate can never exceed the capped amount.
ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For 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 people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell their home or refinance at the lower property value.