Differences between adjustable and fixed loans
With a fixed-rate loan, your payment doesn't change for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but in general, payments on these types of loans don't increase much.
Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay on the loan, more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Stepping Stone Mortgage at (541) 683-3300 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest rates on ARMs are based on a federal index. A few of these 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.
Most programs have a cap that protects you from sudden increases in monthly payments. 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 directly, caps the amount that your monthly payment can increase in a given period. Most ARMs also cap your rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates at the start of the loan. They usually provide that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who expect to move in three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values decrease and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (541) 683-3300. We answer questions about different types of loans every day.