Differences between adjustable and fixed loans
A fixed-rate loan features the same payment over the life of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on your fixed-rate mortgage will increase very little.
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 might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Budica Financial Corporation at (951)840-4188 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they can't go up above a specific amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in a given period. The majority of ARMs also cap your interest rate over the duration of the loan period.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are often best for people who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the initial lock expires.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the home for any longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance.