Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call MS Investment Mortgage Company at (858) 485-5800 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they can't go up above a specific amount in a given period of time. Some ARMs won't adjust more than 2% 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 your monthly payment can go up in one period. Additionally, almost all ARMs have a "lifetime cap" — this cap means that your rate will never go over the capped amount.
ARMs most often feature the lowest, most attractive rates toward the beginning of the loan. They guarantee the lower rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed 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 often best for borrowers who anticipate moving in three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers can't sell or refinance their loan.