Differences between adjustable and fixed loans

A fixed-rate loan features the same payment amount for the entire duration of the loan. The property taxes and homeowners insurance will go up over time, but in general, payment amounts on fixed rate loans don't increase much.

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

You might choose a fixed-rate loan in order to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Pride Of Ownership Inc. at (714) 827-5125 for details.

There are many different types of Adjustable Rate Mortgages. Generally, the interest rates for 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.

Most ARM programs have a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment will not increase beyond a certain amount in a given year. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs most often have the lowest rates at the beginning of the loan. They usually guarantee that interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate loans benefit people who plan to move before the loan adjusts.

Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on staying in the house for any longer than this introductory low-rate period. ARMs are risky if property values go down and borrowers cannot sell their home or refinance their loan.