Adjustable versus fixed rate loans

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With a fixed-rate loan, your monthly payment stays the same for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate loan will increase very little.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller part toward principal. As you pay on the loan, more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (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 favorable rate. Call CFC Mortgage Bankers at (805) 432-4898 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, which means they won't go up above a certain amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment will not go above a certain amount over the course of a given year. In addition, the great majority of ARM programs have a "lifetime cap" — the rate won't go over the capped percentage.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when property values decrease and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (805) 432-4898. We answer questions about different types of loans every day.