Fixed versus adjustable rate loans
A fixed-rate loan features a fixed payment for the entire duration of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for a fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller part goes to principal. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Budica Financial Corporation at (951)840-4188 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures your payment will not go above a certain amount over the course of a given year. Additionally, the great majority of adjustable programs feature a "lifetime cap" — this cap means that your interest rate can't ever go over the capped amount.
ARMs usually start out at a very low rate that may increase over time. You may hear people talking 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 loans are fixed for a number of years (3 or 5), then adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell or refinance at the lower property value.