Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments for your fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, most of the payment is applied to interest. The amount paid toward principal goes up gradually every month.
You can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call JOANNE AHN at 415-999-2439 to learn more.
There are many kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, 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 two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment can't increase beyond a certain amount over the course of a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — this cap means that your rate can't exceed the cap percentage.
ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on staying in the home longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 415-999-2439. It's our job to answer these questions and many others, so we're happy to help!