Adjustable versus fixed loans

A fixed-rate loan features the same payment for the entire duration of your loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans don't increase much.

When you first take out a fixed-rate loan, most of your payment goes toward interest. The amount paid toward principal goes up slowly every month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call MS Investment Mortgage Company at (858) 485-5800 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 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. Sometimes an ARM has a "payment cap" which guarantees that your payment can't go above a certain amount in a given year. The majority of ARMs also cap your rate over the duration of the loan.

ARMs most often have the lowest, most attractive rates toward the start. They usually guarantee the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values decrease and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at (858) 485-5800. It's our job to answer these questions and many others, so we're happy to help!