Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for your fixed-rate mortgage will be very stable.
Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller part toward principal. The amount paid toward your principal amount increases up gradually each month.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call American Commerce Mortgage at 714-970-9700 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are normally adjusted twice a year, based on various indexes.
Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can increase in one period. The majority of ARMs also cap your rate over the life of the loan.
ARMs most often have their lowest, most attractive rates at the start of the loan. They guarantee that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of ARMs benefit people who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values decrease and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 714-970-9700. We answer questions about different types of loans every day.