Adjustable versus fixed loans
A fixed-rate loan features the same payment amount over the life of the loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on fixed rate loans don't increase much.
At the beginning of a a fixed-rate loan, most of your payment is applied to interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Budica Financial Corporation at (951)840-4188 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they can't go up above a certain amount in a given period. Some ARMs won't increase more than two percent 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 that your payment can increase in a given period. Plus, the great majority of ARMs have a "lifetime cap" — this cap means that your rate can't exceed the cap percentage.
ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the loan adjusts.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on staying in the home for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.