Fixed versus adjustable loans
With a fixed-rate loan, your payment never changes for the entire duration of your mortgage. The amount allocated to your principal (the amount you borrowed) will go up, however, your interest payment will go down in the same amount. The property taxes and homeowners insurance will go up over time, but in general, payments on these types of loans vary little.
At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. This proportion reverses as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call SkyWest Mortgage at (916) 399-5500 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs feature this cap, so they can't increase above a specific amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. 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 that your monthly payment can go up in one period. Plus, the great majority of adjustable programs have a "lifetime cap" — this cap means that your interest rate can't ever exceed the cap amount.
ARMs usually start at a very low rate that may increase over time. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to remain in the house longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at (916) 399-5500. It's our job to answer these questions and many others, so we're happy to help!