Fixed versus adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of the loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for your 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 percentage toward principal. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Greystone Loans, Inc. at (909) 467-1090 to learn more.
There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most programs have a cap that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in one period. Most ARMs also cap your rate over the life of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the house longer than the initial low-rate period. ARMs can be risky when property values decrease and borrowers are unable to sell or refinance.