Fixed or ARM Rates

Should I Go With Fixed Rate or Adjustable?

Fixed Rate Mortgages

The traditional fixed rate mortgage is the most common type of loan program, where monthly principal and interest payments never change during the life of the loan. Fixed rate mortgages are available in terms ranging from 10 to 30 years and can be paid off at any time without penalty. This type of mortgage is structured, or "amortized" so that it will be completely paid off by the end of the loan term. 

Adjustable Rate Mortgages (ARM)

Adjustable Rate Mortgages (ARM)s are loans with an interest rate that will vary during the term of the loan. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage, a feature that can provide more home buying power. Adjustable rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years. All ARM loans have a "margin" plus an "index."  The margin is preset, and the index is the varying factor that makes the loan adjustable.  Examples of indexes commonly used include 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI).

When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed until the next pre-designated adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called caps.

Some ARM loans have a conversion feature that would allow you to convert the loan from an adjustable rate to a fixed rate, and normally Certified Capital will recommend this feature. There is a minimal charge to convert, however, the conversion rate is usually slightly higher than the market rate that the lender could provide you at that time by refinancing.