Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The amount of the payment allocated for principal (the loan amount) increases, however, the amount you pay in interest will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on these types of loans change little over the life of the loan.
At the beginning of a a fixed-rate loan, most of the payment is applied to interest. That reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Reliance Mortgage Service, Inc at 562 320-0510 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest rates for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs feature this cap, so they won't go up over a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two 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 rate directly, caps the amount that the payment can increase in a given period. In addition, almost all ARM programs feature a "lifetime cap" — this cap means that your interest rate can't go over the cap amount.
ARMs usually start at a very low rate that usually increases as the loan ages. You've probably read about 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 they adjust after the initial period. Loans like this are best for people who expect to move in three or five years. These types of ARMs benefit people who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the home for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 562 320-0510. We answer questions about different types of loans every day.