Differences between fixed and adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward your principal amount goes up gradually each month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer 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 good rate. Call Reliance Mortgage Service, Inc at 562 320-0510 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, which means they can't go up above a specific amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in a given period. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often have their lowest, most attractive rates toward the start of the loan. They guarantee that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 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. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of ARMs benefit people who plan to move before the initial lock expires.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the home longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at 562 320-0510. It's our job to answer these questions and many others, so we're happy to help!