Adjustable versus fixed loans

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With a fixed-rate loan, your monthly payment never changes for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payments on a fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate loan, the majority your payment goes toward interest. This proportion reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call Excalibur Mortgage Corporation at 714-891-0266 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest on ARMs are determined by an outside index. Some examples of outside indexes 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 programs feature a "cap" that protects you from sudden monthly payment increases. There may be 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 underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in one period. Additionally, almost all adjustable programs feature a "lifetime cap" — this means that your rate can't exceed the cap amount.

ARMs usually start at a very low rate that may increase over time. You may have heard 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 types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for people who anticipate moving in three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to remain in the house longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 714-891-0266. We answer questions about different types of loans every day.



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