Fixed versus adjustable rate loans

With a fixed-rate loan, your payment never changes for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for your fixed-rate loan will be very stable.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part toward principal. This proportion reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, 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.

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

Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment can't increase beyond a fixed amount in a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — your interest rate won't exceed the cap percentage.

ARMs most often have their lowest rates at the beginning. They provide that rate for an initial period that varies greatly. You've likely heard of 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 loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (858) 485-5800. We answer questions about different types of loans every day.