Fixed versus adjustable rate loans
A fixed-rate loan features the same payment amount for the entire duration of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase 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 monthly payment goes toward interest, and a significantly smaller percentage goes to principal. As you pay , more of your payment goes toward principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an 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 can help you lock in a fixed-rate at the best rate currently available. Call SkyWest Mortgage at (916) 399-5500 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they won't increase over a specific amount in a given period. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment will not go above a fixed amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan period.
ARMs most often feature their lowest, most attractive rates at the start of the loan. They usually provide that rate for an initial period that varies greatly. 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 loans are fixed for 3 or 5 years, then adjust. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who will move before the initial lock expires.
Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the home longer than the initial low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance their loan.
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!