Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on your fixed-rate loan will be very stable.

When you first take out a fixed-rate loan, the majority the payment goes toward interest. This proportion gradually reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Riviera Funding NMLS#861382 CA DRE Broker #01186669 at 3103737406 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment will not increase beyond a fixed amount in a given year. Almost all ARMs also cap your rate over the life of the loan period.

ARMs most often feature their lowest rates at the beginning of the loan. They usually provide the lower rate from a month to ten years. 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 a certain number of years (3 or 5), then they adjust. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit people who will move before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to stay in the house longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 3103737406. We answer questions about different types of loans every day.