Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for a fixed-rate mortgage will be very stable.

When you first take out a fixed-rate mortgage loan, the majority the payment is applied to interest. The amount paid toward principal increases up slowly every month.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because 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 provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call VanDyk Mortgage at 760-752-4480 for details.

There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, which means they won't go up over a certain amount in a given period of time. Some ARMs can't adjust more than two percent 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 the monthly payment can increase in one period. Plus, the great majority of ARM programs have a "lifetime cap" — your interest rate won't go over the cap amount.

ARMs usually start at a very low rate that may increase over time. 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 loans are fixed for 3 or 5 years, then adjust. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on staying in the home longer than this initial low-rate period. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance.