Differences between adjustable and fixed loans

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A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate 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 part goes to principal. The amount applied to your principal amount goes up slowly each month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of 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 provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Crossline Capital at 949-380-6837 to discuss how we can help.

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

The majority of ARMs are capped, so they won't increase over a certain amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment will not go above a certain amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan period.

ARMs most often have the lowest, most attractive rates at the beginning of the loan. They usually guarantee that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are best for people who anticipate moving in three or five years. These types of ARMs are best for borrowers who plan to sell their house or refinance before the loan adjusts.

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

Have questions about mortgage loans? Call us at 949-380-6837. We answer questions about different types of loans every day.