Adjustable versus fixed rate loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. The amount that goes for principal (the loan amount) will go up, however, the amount you pay in interest will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts for your fixed-rate loan will be very stable.
At the beginning of a a fixed-rate mortgage loan, most of the payment goes toward interest. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. 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 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 many varieties. Generally, interest on ARMs are determined by an outside index. Some examples of outside indexes 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.
Most ARMs are capped, so they won't go up over a specified amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in a given period. Additionally, almost all ARM programs feature a "lifetime cap" — your interest rate can't ever go over the cap amount.
ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. 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 people who choose ARMs do so because they want to get lower introductory rates and do not plan on remaining in the home for any longer than the introductory low-rate period. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 714-970-9700. It's our job to answer these questions and many others, so we're happy to help!