Adjustable versus fixed loans

With a fixed-rate loan, your payment stays the same for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans change little over the life of the loan.

When you first take out a fixed-rate mortgage loan, the majority the payment is applied to interest. The amount applied to principal goes up slowly each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good 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 a great number of varieties. ARMs are normally adjusted twice a year, based on various indexes.

The majority of ARMs feature this cap, so they can't increase over a specific amount in a given period. Some ARMs won't increase more than 2% 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 that the payment can go up in one period. Plus, the great majority of ARM programs have a "lifetime cap" — this means that the rate will never exceed the cap amount.

ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 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 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the house longer than this introductory low-rate period. ARMs can be risky when property values go down and borrowers cannot sell their home 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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