Differences between adjustable and fixed loans

A fixed-rate loan features the same payment amount for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate loan will increase very little.

During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller part toward principal. This proportion reverses itself as the loan ages.

You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call MS Investment Mortgage Company at (858) 485-5800 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, so they won't go up above a specified amount in a given period. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in one period. Additionally, the great majority of ARM programs have a "lifetime cap" — your interest rate can't ever exceed the cap amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are often best for borrowers who expect to move in three or five years. These types of ARMs most benefit people who will sell their house or refinance before the loan adjusts.

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

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