Fixed versus adjustable loans
A fixed-rate loan features the same payment amount over the life of the mortgage. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans vary little.
When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. The amount applied to your principal amount goes up gradually every month.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Precision Mortgage, Inc. at 206-920-1112 to learn more.
There are many different types of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by an outside 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 ARMs feature this cap, so they can't go up above a specified amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can increase in a given period. Plus, the great majority of adjustable programs have a "lifetime cap" — your rate can't ever go over the cap percentage.
ARMs most often have their lowest, most attractive rates toward the start. They provide that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at 206-920-1112. We answer questions about different types of loans every day.