Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. 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. But generally payment amounts for your fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller part goes to principal. As you pay , more of your payment is applied to principal.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of 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 with a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Greystone Loans, Inc. at (909) 467-1090 to discuss your situation with one of our professionals.
There are many kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
The majority of ARMs are capped, so they can't go up above a specified amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in one period. Plus, almost all ARMs feature a "lifetime cap" — your interest rate won't exceed the capped amount.
ARMs most often feature their lowest rates toward the beginning. They guarantee the lower interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit people who will move before the loan adjusts.
You might choose an ARM to get a very low initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values decrease and borrowers can't sell their home or refinance.