Fixed versus adjustable rate loans

With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but for the most part, payments on fixed rate loans don't increase much.

When you first take out a fixed-rate loan, the majority your payment goes toward interest. That reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Riviera Funding at (310) 373-7406 to learn more.

There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, which means they can't increase over a certain amount in a given period of time. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures that your payment won't increase beyond a certain amount in a given year. Most ARMs also cap your interest rate over the life of the loan period.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then 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 programs benefit borrowers who will move before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan to remain in the house longer than the introductory low-rate period. ARMs can be risky if property values go down 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!

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