Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment remains the same for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. The amount applied to your principal amount goes up gradually each month.

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call American Mortgage Services, Inc. at 9013595912 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest rates on ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages feature this cap, which means they can't go up above a specified amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in a given period. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to stay in the house longer than this initial low-rate period. ARMs can be risky when property values go down and borrowers can't sell their home or refinance.