Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. That gradually reverses itself as the loan ages.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into 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 SelectPlus Lending at 805-636-9222 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, so they can't go up above a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment can't go above a certain amount over the course of a given year. The majority of ARMs also cap your rate over the life of the loan period.

ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for people who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 805-636-9222. It's our job to answer these questions and many others, so we're happy to help!