Adjustable versus fixed loans
With a fixed-rate loan, your payment doesn't change for the life of your loan. The portion that goes for your principal (the loan amount) increases, however, the amount you pay in interest will go down accordingly. The property tax and homeowners insurance will increase over time, but generally, payment amounts on these types of loans don't increase much.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller part toward principal. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because 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 greater 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 learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest for ARMs are based on a federal index. A few of these 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.
The majority of ARMs feature this cap, so they won't go up above a certain amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment won't increase beyond a fixed amount over the course of a given year. Additionally, the great majority of ARM programs feature a "lifetime cap" — the rate can't go over the capped amount.
ARMs most often feature their lowest, most attractive rates at the beginning. 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 types of loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who anticipate moving within three or five years. These types of ARMs benefit borrowers who will move before the loan adjusts.
You might choose an ARM to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down 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!