Differences between adjustable and fixed loans
A fixed-rate loan features the same payment amount for the entire duration of your loan. The property tax and homeowners insurance will go up over time, but in general, payments on fixed rate loans change little over the life of the loan.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to 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 choose fixed-rate loans because interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Budica Financial Corporation at (951)840-4188 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest rates for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs are capped, which means they won't increase over a specified amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in a given period. In addition, almost all ARMs have a "lifetime cap" — this means that the rate can never exceed the cap percentage.
ARMs usually start at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who plan to move before the initial lock expires.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on staying in the house for any longer than this initial low-rate period. ARMs are risky if property values decrease and borrowers can't sell their home or refinance.