Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment doesn't change for the entire duration of your mortgage. The amount of the payment that goes for your principal (the amount you borrowed) will go up, but your interest payment will go down in the same amount. 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.
Early in a fixed-rate loan, most of your payment pays interest, and a significantly smaller percentage goes to principal. The amount applied to your principal amount increases up slowly each month.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. 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 Stepping Stone Mortgage at (541) 683-3300 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in a given period. Most ARMs also cap your rate over the duration of the loan period.
ARMs most often have the lowest rates toward the start. They provide that rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the house longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (541) 683-3300. We answer questions about different types of loans every day.