Differences between adjustable and fixed rate loans
A fixed-rate loan features the same payment amount for the entire duration of your mortgage. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. The amount paid toward principal goes up gradually each month.
You can 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 want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Riviera Funding at (310) 373-7406 to learn more.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates on ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 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 borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment will not go above a fixed amount over the course of a given year. In addition, the great majority of adjustable programs have a "lifetime cap" — your rate can never go over the capped amount.
ARMs most often feature the lowest rates at the beginning of the loan. They provide the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 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 a number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who plan to sell their house or refinance before the loan adjusts.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the house for any longer than the initial low-rate period. ARMs can be risky if property values decrease and borrowers cannot sell or refinance.
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!