Differences between adjustable and fixed loans
A fixed-rate loan features the same payment amount for the entire duration of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. That reverses itself as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Synergy One Lending at (760) 337-8100 to learn more.
There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.
Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't adjust more than two percent 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 the payment can increase in one period. Plus, almost all adjustable programs have a "lifetime cap" — your interest rate won't exceed the capped amount.
ARMs most often feature the lowest rates at the start. They usually guarantee that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan to stay in the home longer than the initial low-rate period. ARMs can be risky when property values go down and borrowers can't sell their home or refinance their loan.