Adjustable versus fixed loans

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A fixed-rate loan features the same payment amount 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 monthly payments for a fixed-rate mortgage will be very stable.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage toward principal. The amount paid toward principal goes up gradually each month.

Borrowers might choose a fixed-rate loan to lock in a low rate. People choose these types of loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call American Equity Mortgage at 6178725064 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs are capped, which means they won't increase over a specified amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. The majority of ARMs also cap your interest rate over the life of the loan.

ARMs most often feature their lowest, most attractive rates at the start. They usually guarantee that rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who will move before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to remain in the home for any longer than this introductory low-rate period. ARMs can be risky if property values decrease and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at 6178725064. It's our job to answer these questions and many others, so we're happy to help!