Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of the loan. The property tax and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans vary little.

Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller percentage goes to principal. The amount applied to principal goes up slowly every month.

You can choose a fixed-rate loan in order to lock in a low rate. People select 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 more consistency in monthly payments. 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 Mission Home Mortgage at (619) 688-0011 to learn more.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest on ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment can't go above a fixed amount over the course of a given year. Almost all ARMs also cap your interest rate over the life of the loan.

ARMs most often have the lowest, most attractive rates toward the beginning. They usually guarantee that rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values decrease and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at (619) 688-0011. We answer questions about different types of loans every day.