Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment remains the same for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments for your fixed-rate mortgage will increase very little.
Your first few years of payments on a fixed-rate loan go primarily toward interest. That gradually reverses itself as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Synergy One Lending at (760) 337-8100 for details.
There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages feature this cap, so they can't go up above a specific amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures that your payment will not go above a certain amount in a given year. Additionally, the great majority of ARMs have a "lifetime cap" — your rate won't go over the capped amount.
ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell their home or refinance with a lower property value.