Fixed versus adjustable rate loans
With a fixed-rate loan, your payment remains the same for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for a fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate mortgage loan, most of your payment is applied to interest. As you pay , more of your payment is applied to principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call American Commerce Mortgage at 714-970-9700 for details.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs have a cap that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than two percent 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 that your monthly payment can increase in one period. Most ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at 714-970-9700. We answer questions about different types of loans every day.