Fixed versus adjustable loans
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A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate mortgage loan, the majority the payment goes toward interest. That reverses itself as the loan ages.
You might choose a fixed-rate loan in order to lock in a low 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 offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Victoria Capital Mortgage Company at 408.399.0103 to discuss how we can help.
There are many types of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs feature this cap, so they won't go up over 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 two percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment will not go above a certain amount over the course of a given year. The majority of ARMs also cap your rate over the duration of the loan.
ARMs most often feature their lowest, most attractive rates toward the start. They usually provide that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values decrease and borrowers are unable to sell or refinance.