Fixed versus adjustable loans
A fixed-rate loan features a fixed payment for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for a fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller part goes to principal. As you pay on the loan, more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more consistency 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 for details.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted twice a year, based on various indexes.
Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. 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 directly, caps the amount that your payment can increase in one period. Almost all ARMs also cap your interest rate over the life of the loan.
ARMs usually start at a very low rate that may increase over time. 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 kinds of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell or refinance at the lower property value.