Fixed versus adjustable rate loans

A fixed-rate loan features the same payment amount over the life of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on these types of loans vary little.

Your first few years of payments on a fixed-rate loan go primarily toward interest. This proportion gradually reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Riviera Funding at (310) 373-7406 to learn more.

There are many kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on an outside index. Some examples of outside indexes 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.

The majority of ARMs feature this cap, so they won't increase above a specified amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures that your payment won't go above a fixed amount over the course of a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — the rate can't exceed the cap percentage.

ARMs most often feature the lowest rates toward the beginning. They provide that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), 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 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 don't plan to remain in the home longer than this initial low-rate period. ARMs are risky if property values go down and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at (310) 373-7406. We answer questions about different types of loans every day.

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