Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment for the entire duration of the loan. The property tax and homeowners insurance will go up over time, but in general, payments on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan go primarily toward interest. As you pay , more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking 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 types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by a federal index. A few of these 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 ARM programs have a cap that protects you from sudden increases in monthly payments. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment won't go above a fixed amount in a given year. Additionally, the great majority of adjustable programs have a "lifetime cap" — the interest rate will never exceed the cap amount.

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

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than this initial low-rate period. ARMs can be risky when property values go down and borrowers cannot 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!