Differences between adjustable and fixed loans
With a fixed-rate loan, your payment never changes for the life of the loan. The amount of the payment allocated for principal (the amount you borrowed) will go up, but the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments on a fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount applied to your principal amount increases up slowly each month.
You can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Cal Coast Financial Corp at (510) 683-9850 for details.
There are many different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, which means they can't go up above a specified amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in one period. Additionally, almost all ARMs have a "lifetime cap" — the interest rate can't ever go over the capped amount.
ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a lower initial rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky when property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at (510) 683-9850. It's our job to answer these questions and many others, so we're happy to help!