Adjustable versus fixed loans
With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on these types of loans vary little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount applied to principal goes up slowly every month.
Borrowers might choose a fixed-rate loan to lock in a low rate. People 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 more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a good rate. Call Budica Financial Corporation at (951)840-4188 to learn more.
There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees that your payment can't go above a certain amount over the course of a given year. Additionally, the great majority of ARMs have a "lifetime cap" — this means that your rate won't exceed the cap percentage.
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". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans most benefit people who will move before the initial lock expires.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell or refinance with a lower property value.