Fixed versus adjustable loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the loan. The portion of the payment that goes to your principal (the actual loan amount) will go up, however, your interest payment will go down in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for your fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount applied to principal goes up gradually each month.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call USA Financial Services at 714-508-7905 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
Most ARMs are capped, which means they can't go up above a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can increase in a given period. Additionally, the great majority of ARM programs have a "lifetime cap" — this cap means that your interest rate can't exceed the cap amount.
ARMs most often have their lowest, most attractive rates toward the beginning of the loan. They provide that interest 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 fixed 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 after the initial period. Loans like this are best for borrowers who anticipate moving within three or five years. These types of ARMs benefit people who will move before the loan adjusts.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan to stay in the home for any longer than this initial low-rate period. ARMs can be risky if property values decrease and borrowers are unable to sell their home or refinance their loan.