Differences between fixed and adjustable loans

With a fixed-rate loan, your payment doesn't change for the life of your loan. The amount of the payment allocated to your principal (the loan amount) will increase, but your interest payment will go down accordingly. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on fixed rate loans don't increase much.

When you first take out a fixed-rate loan, the majority the payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call Riviera Funding at (310) 373-7406 for details.

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most programs have a cap that protects you from sudden increases in monthly payments. Your ARM may feature 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 index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can increase in a given period. In addition, the great majority of adjustable programs have a "lifetime cap" — the interest rate can never exceed the capped amount.

ARMs most often feature the lowest, most attractive rates toward the start. They guarantee that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for people who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can't sell or refinance at the lower property value.

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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