Differences between fixed and adjustable loans

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With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The portion allocated for your principal (the loan amount) will increase, but your interest payment will go down in the same amount. The property taxes and homeowners insurance will increase over time, but generally, payments on these types of loans vary little.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a much smaller part goes to principal. That reverses itself as the loan ages.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call San Diego Financial at 760-415-2345 to discuss your situation with one of our professionals.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 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 are capped, so they can't increase above a certain amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. 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. Sometimes an ARM features a "payment cap" which guarantees your payment will not increase beyond a fixed amount in a given year. Plus, the great majority of adjustable programs feature a "lifetime cap" — your interest rate won't exceed the cap percentage.

ARMs most often have the lowest rates toward the start of the loan. They provide the lower interest rate for an initial period that varies greatly. You've probably heard of 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 loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan to stay in the home for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 760-415-2345. It's our job to answer these questions and many others, so we're happy to help!