Fixed versus adjustable loans

A fixed-rate loan features the same payment amount for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate mortgage will increase very little.

When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. The amount paid toward your principal amount increases up gradually each month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call MS Investment Mortgage Company at (858) 485-5800 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARMs are capped, so they won't increase over a specified amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment won't go above a fixed amount in a given year. Plus, almost all adjustable programs feature a "lifetime cap" — this cap means that your interest rate can never go over the capped percentage.

ARMs most often have their lowest, most attractive rates toward the start. They provide the lower interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory 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. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who will move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on staying in the house longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell or refinance at the lower property value.

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!