Fixed versus adjustable rate loans

A fixed-rate loan features the same payment amount over the life of the loan. The property tax and homeowners insurance will increase over time, but in general, payment amounts on these types of loans change little over the life of the loan.

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

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at the lower 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'd love to help you lock in a fixed-rate at the best rate currently available. Call MS Investment Mortgage Company at (858) 485-5800 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a "cap" that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in one period. Most ARMs also cap your interest rate over the life of the loan period.

ARMs most often have their lowest rates toward the beginning of the loan. They provide the lower interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of ARMs are best for people who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the home longer than this initial low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell their home or refinance their loan.

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