Fixed versus adjustable rate loans
A fixed-rate loan features the same payment over the life of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part toward principal. The amount paid toward principal increases up slowly each month.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of 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 greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call Stepping Stone Mortgage at (541) 683-3300 for details.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates on ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a "cap" that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. Most ARMs also cap your interest rate over the life of the loan period.
ARMs usually start 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 initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for people who expect to move in three or five years. These types of ARMs are best for borrowers who will move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell their home or refinance at the lower property value.
Have questions about mortgage loans? Call us at (541) 683-3300. It's our job to answer these questions and many others, so we're happy to help!