Differences between fixed and adjustable rate loans

With a fixed-rate loan, your payment doesn't change for the entire duration of your loan. The portion of the payment allocated to your principal (the actual loan amount) will go up, but your interest payment will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans don't increase much.

When you first take out a fixed-rate loan, the majority your payment is applied to interest. That gradually reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call American Commerce Mortgage at 714-970-9700 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust every six months, based on various indexes.

Most programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment won't increase beyond a fixed amount in a given year. In addition, almost all ARMs have a "lifetime cap" — this means that the interest rate will never exceed the cap amount.

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

You might choose an ARM to get a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell their home or refinance with a 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!