Fixed versus adjustable loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on fixed rate loans change little over the life of the loan.

When you first take out a fixed-rate loan, the majority your payment goes toward interest. This proportion reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call MS Investment Mortgage Company at (858) 485-5800 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest for ARMs are based on a federal index. Some examples of outside indexes 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 programs have a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment can't go above a certain amount in a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — this cap means that your rate can't go over the cap amount.

ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan to remain in the house longer than the introductory low-rate period. ARMs can be risky when property values go down 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.