Differences between fixed and adjustable loans

	Are you looking for a mortgage? We will be glad to help! Call us at 760.975.0255. Ready to begin? Apply Now.

A fixed-rate loan features a fixed payment amount for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on your fixed-rate loan will be very stable.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage goes to principal. The amount paid toward principal increases up slowly every month.

You might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because 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 consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call American Capital Home Loans at 760.975.0255 for details.

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

Most ARM programs feature a cap that protects you from sudden monthly payment increases. 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 a year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment won't go above a certain amount in a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — this means that the rate can't go over the capped amount.

ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed 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 they adjust. Loans like this are usually best for people who anticipate moving within three or five years. These types of ARMs are best for people who plan to sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get 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 property values decrease and borrowers cannot sell or refinance.

Have questions about mortgage loans? Call us at 760.975.0255. We answer questions about different types of loans every day.