Adjustable versus fixed loans

With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The portion that goes to principal (the amount you borrowed) will increase, however, your interest payment will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for your fixed-rate loan will increase very little.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage toward principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater 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 The Reen Team at American Pacific Mortgage at (408) 626-1879 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.

The majority of ARMs 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 interest rate increases over the course of a year. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment won't go above a fixed amount in a given year. Plus, the great majority of ARMs feature a "lifetime cap" — this cap means that the rate won't exceed the cap amount.

ARMs usually start out at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (408) 626-1879. We answer questions about different types of loans every day.

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