Differences between fixed and adjustable loans
With a fixed-rate loan, your payment never changes for the life of the loan. The amount of the payment allocated to principal (the actual loan amount) goes up, but your interest payment will decrease accordingly. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. That reverses itself as the loan ages.
You 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 wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can 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. ARMs usually adjust twice a year, based on various indexes.
Most ARMs are capped, which means they can't increase above a specific amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment won't increase beyond a certain amount in a given year. Plus, almost all ARMs feature a "lifetime cap" — the rate can't go over the capped amount.
ARMs most often have the lowest rates at the start of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so because they want to get lower introductory rates and don't plan on remaining in the home longer than the initial low-rate period. ARMs are risky when property values go down and borrowers are unable to sell their home or refinance.