Fixed vs. adjustable rate mortgages

With a fixed-rate mortgage loan, your monthly payment never changes for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but generally, payments on fixed rate loans don't increase much.

At the beginning of a a fixed-rate mortgage loan, the majority of your payment is applied to interest. The amount applied to principal goes up gradually every month.

You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in this lower rate. If you currently have an Adjustable Rate Mortgage (ARM), refinancing to a fixed-rate mortgage loan can provide greater stability in monthly payments. Contact us  to learn more about your mortgage loan options.



Adjustable Rate Mortgages (ARMs), come in a great number of varieties. Generally, the interest rates on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments.  Sometimes an ARM has a "payment cap" which ensures the mortgage payment can't increase beyond a certain amount over the course of a given year. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. The majority of ARMs also cap the rate over the life of the loan period.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are usually best for people who anticipate moving within the three or five years period, before the loan adjusts.

Most people who choose ARMs do so because they want the lower introductory rates.  On the other hand, ARMs can be risky if property values decrease and borrowers can't sell their home or refinance their loan.

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