Adjustable versus fixed loans

A fixed-rate loan features a fixed payment over the life of your loan. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on these types of loans vary little.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage goes to principal. The amount applied to principal increases up slowly every month.

You might 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 wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call MS Investment Mortgage Company at (858) 485-5800 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. 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 have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can increase in one period. In addition, the great majority of adjustable programs have a "lifetime cap" — this cap means that the interest rate won't go over the capped percentage.

ARMs usually start at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set 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 adjust after the initial period. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values decrease and borrowers are unable to sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (858) 485-5800. We answer questions about different types of loans every day.