A fixed-rate loan features the same payment amount over the life of the mortgage. The property tax and homeowners insurance will go up over time, but generally, payments on fixed rate loans vary little.
When you first take out a fixed-rate mortgage loan, the majority the payment goes toward interest. This proportion gradually reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Sunrise Vista Mortgage at 916-920-7000 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust every six months, based on various indexes.
Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs can’t increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a “payment cap” which guarantees your payment won’t go above a fixed amount in a given year. Additionally, the great majority of ARM programs feature a “lifetime cap” — your interest rate won’t go over the cap amount.
ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They usually provide that 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 kinds of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate loans are best for people who will sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don’t plan on remaining in the home longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell or refinance with a lower property value.