Adjustable versus fixed loans
With a fixed-rate loan, your payment doesn't change for the entire duration of the loan. The portion allocated for your principal (the actual loan amount) will increase, but your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments for your fixed-rate loan will increase very little.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward your principal amount increases up slowly each month.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call 1st Los Angeles Mortgage at (888) 525-6267 to discuss your situation with one of our professionals.
There are many kinds of Adjustable Rate Mortgages. Generally, interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs are capped, which means they can't increase over a specified amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in one period. Additionally, the great majority of ARM programs feature a "lifetime cap" — this cap means that your interest rate can't ever exceed the cap percentage.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so because they want to get lower introductory rates and don't plan on remaining in the house for any longer than the introductory 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 with a lower property value.
Have questions about mortgage loans? Call us at (888) 525-6267. It's our job to answer these questions and many others, so we're happy to help!