Fixed versus adjustable loans

A fixed-rate loan features the same payment amount over the life of your loan. The property taxes and homeowners insurance will go up over time, but in general, payments on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. As you pay , more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call American Commerce Mortgage at 714-970-9700 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest rates on ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, which means they can't go up over a specified amount in a given period. 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 directly, caps the amount your monthly payment can increase in a given period. Plus, the great majority of ARM programs have a "lifetime cap" — your interest rate can't exceed the capped percentage.

ARMs usually start out at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate loans benefit people who plan to sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan on remaining in the house longer than the initial low-rate period. ARMs are risky when property values decrease and borrowers are unable to 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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