Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but generally, payments on these types of loans change little over the life of the loan.
When you first take out a fixed-rate loan, most of your payment is applied to interest. The amount paid toward principal goes up slowly every month.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call American Commerce Mortgage at 714-970-9700 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs feature a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in one period. In addition, almost all ARM programs have a "lifetime cap" — this cap means that the rate can't go over the cap amount.
ARMs most often have the lowest, most attractive rates toward the beginning of the loan. They provide the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the home longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell their home 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.