Differences between adjustable and fixed rate loans
A fixed-rate loan features a fixed payment for the entire duration of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on these types of loans vary little.
When you first take out a fixed-rate loan, most of the payment is applied to interest. The amount applied to your principal amount increases up gradually each month.
You might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Stepping Stone Mortgage at (541) 683-3300 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates on ARMs are determined by an outside 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.
The majority of ARMs feature this cap, which means they won't go up over a specific amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment can't increase beyond a fixed amount over the course of a given year. Additionally, almost all ARM programs have a "lifetime cap" — the rate can't ever exceed the cap percentage.
ARMs most often feature their lowest rates at the start of the loan. They usually guarantee the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are best for borrowers who expect to move within three or five years. These types of ARMs most benefit borrowers 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 goes up. ARMs are risky if property values decrease and borrowers can't sell or refinance.
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!