Adjustable versus fixed loans

A fixed-rate loan features a fixed payment over the life of the loan. 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 a fixed-rate loan will increase very little.

Early in a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage toward principal. That reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call The Reen Team at American Pacific Mortgage at (408) 626-1879 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are normally adjusted twice a year, based on various indexes.

The majority of ARMs feature this cap, which means they won't go up above a specified 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 a couple percent a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment won't go above a certain amount over the course of a given year. Plus, the great majority of ARMs feature a "lifetime cap" — this cap means that your rate can't ever go over the cap percentage.

ARMs most often feature their lowest rates toward the start. They usually provide that rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit borrowers 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 on staying 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 rates that go up if they can't sell or refinance with a 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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