Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans don't increase much.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. That gradually reverses itself as the loan ages.
Borrowers can 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 this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Greystone Loans, Inc. at (909) 467-1090 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust every six months, based on various indexes.
Most programs feature a cap that protects you from sudden increases in monthly payments. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment can't go above a certain amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan.
ARMs usually start at a very low rate that may increase as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set 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. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. 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 with a lower property value.