Fixed versus adjustable rate loans

With a fixed-rate loan, your payment doesn't change for the life of the mortgage. The portion of the payment allocated for principal (the actual loan amount) will go up, but the amount you pay in interest will go down in the same amount. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. That gradually reverses as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), 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.

There are many kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

Most ARMs feature this cap, so they can't increase over a specified amount in a given period of time. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in one period. Plus, the great majority of adjustable programs have a "lifetime cap" — this cap means that your interest rate can't go over the capped percentage.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably 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 kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for people who anticipate moving in three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to stay in the house longer than this initial low-rate period. ARMs are risky when property values decrease and borrowers cannot 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.