Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment stays the same for the life of the loan. The portion of the payment that goes to your principal (the actual loan amount) goes up, but your interest payment will decrease accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate mortgage loan, most of the payment goes toward interest. The amount paid toward principal increases up gradually every month.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call MS Investment Mortgage Company at (858) 485-5800 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs are capped, so they can't go up over a specified amount in a given period. Some ARMs can't adjust 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 rate directly, caps the amount that the payment can go up in a given period. Most ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest rates toward the start. They usually guarantee the lower interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 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 certain number of years (3 or 5), then adjust. These loans are often best for borrowers who expect to move in three or five years. These types of ARMs benefit 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 home longer than the initial low-rate period. ARMs are risky when property values go down and borrowers are unable to sell or refinance.