Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment never changes for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller part toward principal. The amount paid toward your principal amount goes up gradually each month.
You might choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), 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.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most ARM programs feature a cap that protects you from sudden monthly payment increases. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment won't go above a certain amount over the course of a given year. In addition, the great majority of ARMs have a "lifetime cap" — the interest rate can never go over the capped percentage.
ARMs usually start out 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 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 after the initial period. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who will move before the initial lock expires.
You might choose an ARM to take advantage of a lower introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky if property values decrease and borrowers can't sell their home or refinance their loan.