Fixed versus adjustable rate loans

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A fixed-rate loan features the same payment for the entire duration of the mortgage. The property tax and homeowners insurance will increase over time, but for the most part, payments on these types of loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage goes to principal. The amount applied to your principal amount goes up gradually each month.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Mortgage Team America at (949) 837-1559 to discuss how we can help.

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 Adjustable Rate Mortgages feature this cap, which means they can't go up over a specified amount in a given period of time. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment can't go above a fixed amount in a given year. Most ARMs also cap your rate over the duration of the loan period.

ARMs usually start out at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set 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 adjust. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who will move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to remain in the home for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (949) 837-1559. It's our job to answer these questions and many others, so we're happy to help!