Differences between adjustable and fixed rate loans

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With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The portion allocated to your principal (the amount you borrowed) will increase, but your interest payment will go down in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments on your fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount applied to principal increases up slowly every month.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call VITEK MORTGAGE GROUP at 530-885-1545 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest for 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.

The majority of Adjustable Rate Mortgages are capped, which means they can't increase over a specified amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment can't go above a fixed amount over the course of a given year. Additionally, the great majority of ARM programs have a "lifetime cap" — this cap means that your rate can't ever go over the capped percentage.

ARMs usually start out at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are best for people who anticipate moving in three or five years. These types of ARMs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a very low introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot sell their home or refinance with a lower property value.

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