Differences between fixed and adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The portion of the payment that goes for principal (the loan amount) increases, however, your interest payment will decrease in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments on a fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part goes to principal. This proportion reverses as the loan ages.
Borrowers can 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 low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Greystone Loans, Inc. at (909) 467-1090 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, 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 ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment can't increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan period.
ARMs most often feature their lowest, most attractive rates at the beginning of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. 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. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the initial lock expires.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to remain in the home for any longer than the initial low-rate period. ARMs are risky if property values decrease and borrowers can't sell their home or refinance their loan.