With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The portion allocated to your principal (the actual loan amount) will increase, however, the amount you pay in interest will decrease accordingly. 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.
When you first take out a fixed-rate loan, most of the payment is applied to interest. The amount paid toward your principal amount goes up slowly each month.
You can choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans because interest rates are low and they want to lock in at the lower rate.
If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Midgate Mortgage at 310-791-0854 to discuss how we can help.
Generally, interest rates on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs feature this cap, so they can't go up over a specified amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period.
For example: no more than two percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in one period. In addition, the great majority of ARM programs have a "lifetime cap" — the rate won't go over the cap percentage.
ARMs usually start at a very low rate that may increase over time.
You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for people who plan to move before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky when property values decrease and borrowers are unable to sell or refinance.
Have questions about mortgage loans? Call us at 310-791-0854. It's our job to answer these questions and many others, so we're happy to help!