Differences between adjustable and fixed loans
With a fixed-rate loan, your payment stays the same for the life of the mortgage. The portion that goes to your principal (the amount you borrowed) will go up, but the amount you pay in interest will decrease in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate mortgage loan, most of your payment is applied to interest. As you pay , more of your payment goes toward principal.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Cal Coast Financial Corp at (510) 683-9850 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust every six months, based on various indexes.
Most programs feature a cap that protects you from sudden increases in monthly payments. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in a given period. Most ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature the lowest rates toward the start. They provide that rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are best for borrowers who expect to move within three or five years. These types of ARMs are best for people who will move before the loan adjusts.
You might choose an ARM to get a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky if property values go down and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at (510) 683-9850. We answer questions about different types of loans every day.
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