Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment amount over the life of your loan. 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 increase very little.
At the beginning of a a fixed-rate loan, most of the payment goes toward interest. This proportion gradually reverses itself as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Greystone Loans, Inc. at (909) 467-1090 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most programs have a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in one period. In addition, the great majority of adjustable programs feature a "lifetime cap" — the rate can never exceed the capped amount.
ARMs most often have the lowest, most attractive rates at the start of the loan. They usually provide that interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of ARMs are best for borrowers who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell or refinance at the lower property value.