Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for your fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage toward principal. This proportion gradually reverses as the loan ages.
You might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), 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.
There are many different types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages feature this cap, which means they won't increase above a specific amount in a given period. 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 a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment will not go above a fixed amount in a given year. In addition, the great majority of ARMs feature a "lifetime cap" — this means that your rate won't go over the cap percentage.
ARMs most often have the lowest, most attractive rates toward the start of the loan. They usually provide that interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will move before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the house for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the lower property value.