Fixed versus adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of your loan. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans don't increase much.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part toward principal. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer 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 a good rate. Call Synergy One Lending at (760) 337-8100 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust 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. Most ARMs also cap your rate over the duration of the loan.
ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 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. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the home longer than the initial low-rate period. ARMs are risky if property values go down and borrowers are unable to sell or refinance.