Differences between fixed and adjustable loans

A fixed-rate loan features the same payment amount for the entire duration of your mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on a fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount paid toward principal goes up gradually each month.

You might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call American Commerce Mortgage at 714-970-9700 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest rates for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs are capped, which means they can't increase over a specific amount in a given period. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can increase in one period. Almost all ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who plan to move before the loan adjusts.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the home longer than this initial low-rate period. ARMs are risky when property values go down and borrowers can't sell 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.

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