Adjustable versus fixed loans

With a fixed-rate loan, your payment never changes for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on these types of loans don't increase much.

Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller percentage goes to principal. This proportion reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Synergy One Lending at (760) 337-8100 to learn more.

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your payment can go up in one period. Plus, almost all adjustable programs feature a "lifetime cap" — your interest rate can't ever exceed the cap percentage.

ARMs most often feature their lowest, most attractive rates toward the start of the loan. They guarantee the lower interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. These loans are often best for borrowers who anticipate moving in three or five years. These types of ARMs are best for people who will sell their house or refinance before the loan adjusts.

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 for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (760) 337-8100. It's our job to answer these questions and many others, so we're happy to help!