Differences between adjustable and fixed loans
With a fixed-rate loan, your payment stays the same for the entire duration of the loan. The portion allocated for your principal (the actual loan amount) increases, but the amount you pay in interest will decrease accordingly. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on fixed rate loans don't increase much.
When you first take out a fixed-rate mortgage loan, the majority your payment is applied to interest. That gradually reverses itself as the loan ages.
You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Riviera Funding at (310) 373-7406 to discuss how we can help.
There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
Most ARM programs feature a cap that protects borrowers from sudden increases in monthly payments. 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 if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment will not go above a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs most often feature the lowest, most attractive rates toward the beginning. They usually guarantee that rate from a month to ten years. You've likely read about 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 types of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for people who anticipate moving within three or five years. These types of ARMs most benefit borrowers who will move before the initial lock expires.
Most people who choose ARMs do so when they want to get lower introductory rates and don't plan on staying in the home for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance with a lower property value.
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!