Fixed versus adjustable rate loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments for your fixed-rate loan will increase very little.

At the beginning of a a fixed-rate mortgage loan, the majority your payment goes toward interest. This proportion gradually reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call American Commerce Mortgage at 714-970-9700 to discuss your situation with one of our professionals.

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

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. There may be 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 features a "payment cap" that ensures that your payment won't go above a fixed amount over the course of a given year. Additionally, almost all ARM programs have a "lifetime cap" — this cap means that your rate will never exceed the cap amount.

ARMs usually start at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 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 they adjust. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up 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.

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