Fixed versus adjustable loans

A fixed-rate loan features a fixed payment amount for the entire duration of the loan. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans don't increase much.

During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller percentage toward principal. The amount applied to your principal amount increases up slowly each month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an 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'd love 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, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.

Most programs feature a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment will not increase beyond a fixed amount over the course of a given year. Plus, the great majority of ARMs have a "lifetime cap" — your rate won't exceed the capped amount.

ARMs usually start out at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. In 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 number of years (3 or 5), then adjust. These loans are usually best for people who anticipate moving within three or five years. These types of ARMs most benefit people who plan to move before the loan adjusts.

You might choose an ARM to take advantage of a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs are risky if property values decrease and borrowers can't sell or refinance.

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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