Differences between fixed and adjustable loans
With a fixed-rate loan, your payment stays 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 so might the homeowner’s insurance in your monthly payment. For the most part payments for a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount paid toward principal goes up gradually each month.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose 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 provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we’ll be glad to assist you in locking a fixed-rate at a favorable rate. Call Premiere Properties at 760-930-0325 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are normally adjusted twice a year, based on various indexes.
Most programs have a “cap” that protects you from sudden monthly payment increases. Some ARMs won’t increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a “payment cap” which ensures that your payment can’t increase beyond a fixed amount over the course of a given year. In addition, almost all ARMs have a “lifetime cap” — the interest rate won’t go over the capped amount.
ARMs usually start out at a very low rate that may increase as the loan ages. You’ve likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.
You might choose an ARM to take advantage of a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can’t sell or refinance at the lower property value.