Adjustable versus fixed rate loans
With a fixed-rate loan, your payment doesn't change for the entire duration of the mortgage. The portion that goes to your principal (the amount you borrowed) will go up, but the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate loan will be very stable.
Your first few years of payments on a fixed-rate loan go mostly to pay interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they wish 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 currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call American Commerce Mortgage at 714-970-9700 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees that your payment will not increase beyond a fixed amount over the course of a given year. In addition, almost all ARM programs have a "lifetime cap" — this cap means that the rate can't exceed the cap amount.
ARMs usually start at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For 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 they adjust after the initial period. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who plan to move before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't 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!