Adjustable versus fixed loans

A fixed-rate loan features the same payment for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on your fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay , more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when 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 greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Alliance One Mortgage at 626-363-9246 to learn more.

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

Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. Some ARMs won't increase more than two percent 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 the monthly payment can go up in a given period. Most ARMs also cap your rate over the duration of the loan.

ARMs usually start at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who plan to move before the initial lock expires.

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

Have questions about mortgage loans? Call us at 626-363-9246. We answer questions about different types of loans every day.