Fixed versus adjustable loans
A fixed-rate loan features the same payment for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans don't increase much.
When you first take out a fixed-rate loan, most of your payment is applied to interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Greystone Loans, Inc. at (909) 467-1090 to learn more.
There are many different types of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on an outside index. A few of these 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 you from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in a given period. Plus, almost all ARMs have a "lifetime cap" — your interest rate will never exceed the cap amount.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for borrowers who anticipate moving 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.
Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to stay in the home for any longer than the initial low-rate period. ARMs are risky when property values go down and borrowers cannot sell or refinance their loan.