Fixed versus adjustable rate loans
With a fixed-rate loan, your monthly payment stays the same for the life of the loan. The amount of the payment that goes for your principal (the actual loan amount) will go up, however, your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments on a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. This proportion reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Riviera Funding NMLS#861382 CA DRE Broker #01186669 at 3103737406 to learn more.
There are many different types of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of Adjustable Rate Mortgages are capped, so they won't increase over a specific amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can go up in a given period. In addition, the great majority of adjustable programs feature a "lifetime cap" — the rate will never go over the cap amount.
ARMs usually start at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of ARMs benefit people who will sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan on staying in the home longer than this introductory low-rate period. ARMs can be risky if property values decrease and borrowers cannot sell or refinance their loan.
Have questions about mortgage loans? Call us at 3103737406. We answer questions about different types of loans every day.