Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but generally, payments on these types of loans vary little.
At the beginning of a a fixed-rate loan, most of your payment goes toward interest. The amount applied to principal increases up slowly each month.
You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call American Commerce Mortgage at 714-970-9700 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, which means they won't go up over a specified amount in a given period of time. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment won't go above a fixed amount over the course of a given year. In addition, the great majority of adjustable programs have a "lifetime cap" — the rate will never exceed the capped percentage.
ARMs most often have their lowest rates at the beginning. They usually guarantee that interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan on remaining in the home longer than this initial low-rate period. ARMs are risky when property values go down and borrowers can't sell or refinance their loan.
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!