Adjustable versus fixed rate loans
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A fixed-rate loan features a fixed payment amount over the life of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans vary little.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part goes to principal. As you pay , more of your payment is applied to principal.
Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate 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 offer more 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 Smith-Craine Real Estate Financing at 415-406-2330 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates for ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages feature this cap, which means they won't go up above a specified amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can increase in a given period. Most ARMs also cap your rate over the duration of the loan period.
ARMs most often feature their lowest rates at the start of the loan. They provide the lower interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on remaining in the home longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at 415-406-2330. It's our job to answer these questions and many others, so we're happy to help!