Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment over the life of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater 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 a good rate. Call Citywide Group at 5627761515 to learn more.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages feature this cap, so they can't go up over a specified amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in a given period. In addition, the great majority of ARM programs have a "lifetime cap" — the interest rate won't exceed the capped percentage.

ARMs most often feature their lowest, most attractive rates at the beginning of the loan. They provide the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to stay in the house for any longer than this initial low-rate period. ARMs are risky when property values decrease and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at 949-200-3800. It's our job to answer these questions and many others, so we're happy to help!