Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment remains the same for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay on the loan, more of your payment is applied to principal.
You can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call Budica Financial Corporation at (951)840-4188 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest on ARMs are determined by a federal 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.
Most Adjustable Rate Mortgages feature this cap, so they can't go up above a specific amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in one period. The majority of ARMs also cap your rate over the life of the loan.
ARMs most often have their lowest rates at the beginning of the loan. They usually guarantee that rate for an initial period that varies greatly. You may have heard 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 usually best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit people who will move before the initial lock expires.
You might choose an ARM to take advantage of a lower initial rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values go down and borrowers cannot sell their home or refinance their loan.