Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment stays the same for the entire duration of the mortgage. The amount of the payment that goes for your principal (the loan amount) will increase, but your interest payment will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. This proportion reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more 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 favorable rate. Call American Commerce Mortgage at 714-970-9700 for details.
There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they won't increase above a specified amount in a given period of time. Some ARMs can'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 rate directly, caps the amount the monthly payment can increase in a given period. In addition, the great majority of ARMs have a "lifetime cap" — this cap means that the rate can't exceed the capped amount.
ARMs most often feature their lowest, most attractive rates at the beginning of the loan. They guarantee that interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and don't plan to stay in the home for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 714-970-9700. We answer questions about different types of loans every day.