Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment amount over the life of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on your fixed-rate loan will increase very little.

Early in a fixed-rate loan, most of your payment pays interest, and a much smaller percentage goes to principal. This proportion gradually reverses as the loan ages.

You might 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 want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad 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. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 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 can't increase over a certain amount in a given period. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures your payment can't go above a fixed amount in a given year. Almost all ARMs also cap your rate over the life of the loan.

ARMs most often have their lowest rates at the start of the loan. They provide that rate from a month to ten years. 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. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell or refinance at the lower property value.

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!

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