Differences between fixed and adjustable loans

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With a fixed-rate loan, your payment stays the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on these types of loans vary little.

During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage goes to principal. As you pay , more of your payment goes toward principal.

You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call ICM Lending at 714-713-9193 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, which means they won't increase over 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 underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment can't increase beyond a fixed amount over the course of a given year. Plus, the great majority of ARMs have a "lifetime cap" — your rate can't ever go over the cap amount.

ARMs most often feature their lowest, most attractive rates at the beginning of the loan. They provide that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who anticipate moving within three or five years. These types of ARMs are best for people who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the home longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 714-713-9193. It's our job to answer these questions and many others, so we're happy to help!

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