Differences between adjustable and fixed loans

With a fixed-rate loan, your payment doesn't change for the entire duration of the mortgage. The portion of the payment that goes to principal (the loan amount) goes up, but the amount you pay in interest will decrease accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts for a fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount applied to principal goes up gradually each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an 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 can help you lock in a fixed-rate at a good rate. Call MS Investment Mortgage Company at (858) 485-5800 to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, interest on ARMs are determined by a federal index. Some examples of outside indexes 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 can't go up above a specific amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment can't increase beyond a fixed amount over the course of a given year. In addition, almost all ARMs feature a "lifetime cap" — this means that the rate can't ever go over the capped percentage.

ARMs usually start out at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who will move before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the home for any longer than the initial low-rate period. ARMs can be risky when property values go down and borrowers can't sell their home or refinance.

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