Adjustable versus fixed rate loans

A fixed-rate loan features the same payment amount for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate loan will increase very little.

At the beginning of a a fixed-rate loan, most of the payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call The Reen Team at American Pacific Mortgage at (408) 626-1879 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages are capped, which means they can't go up above a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can go up in one period. Plus, almost all adjustable programs have a "lifetime cap" — this cap means that your rate won't exceed the capped percentage.

ARMs most often have the lowest rates toward the start. They usually provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed 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. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for people who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to stay in the house for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (408) 626-1879. It's our job to answer these questions and many others, so we're happy to help!

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