Fixed versus adjustable loans
With a fixed-rate loan, your payment doesn't change for the entire duration of your loan. The portion that goes to your principal (the loan amount) increases, however, your interest payment will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount paid toward your principal amount goes up slowly every month.
You can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Stepping Stone Mortgage at (541) 683-3300 for details.
There are many types of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 ARM programs feature 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. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in one period. Additionally, almost all ARMs have a "lifetime cap" — this means that your interest rate can never exceed the cap percentage.
ARMs most often feature their lowest rates toward the start. They guarantee the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 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 after the initial period. These loans are usually best for people who expect to move within three or five years. These types of ARMs are best for borrowers who plan to move before the initial lock expires.
You might choose an ARM to get a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values decrease and borrowers can't sell or refinance their loan.
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!