Adjustable versus fixed rate loans
With a fixed-rate loan, your payment stays the same for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but for the most part, payments on these types of loans don't increase much.
When you first take out a fixed-rate mortgage loan, the majority the payment goes toward interest. That gradually reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. 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 on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, which means they won't go up over a specific amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment won't go above a fixed amount in a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs usually start out at a very low rate that usually increases over time. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to move before the initial lock expires.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the house for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell or refinance at the lower property value.