Adjustable versus fixed loans

A fixed-rate loan features a fixed payment amount over the life of your mortgage. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans vary little.

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

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call American Commerce Mortgage at 714-970-9700 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most programs have a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment can't go above a fixed amount in a given year. Plus, the great majority of adjustable programs feature a "lifetime cap" — your rate can't ever go over the capped amount.

ARMs most often feature their lowest, most attractive rates toward the start. They guarantee the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of ARMs are best for people who plan to move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on staying in the home longer than this introductory low-rate period. ARMs can be risky when property values go down and borrowers cannot sell or refinance.

Have questions about mortgage loans? Call us at 714-970-9700. We answer questions about different types of loans every day.

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