Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your mortgage. The amount allocated to your principal (the amount you borrowed) increases, however, your interest payment will go down accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for your fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Riviera Funding at (310) 373-7406 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted twice a year, based on various indexes.
Most ARM programs feature a cap that protects you from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't increase beyond a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often have the lowest rates toward the start of the loan. They guarantee the lower rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial 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 often best for people who expect to move within three or five years. These types of adjustable rate loans most benefit people who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan on remaining in the house longer than the introductory low-rate period. ARMs can be risky when property values go down and borrowers can't sell or refinance their loan.
Have questions about mortgage loans? Call us at (310) 373-7406. It's our job to answer these questions and many others, so we're happy to help!