Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment stays the same for the entire duration of the mortgage. The amount of the payment allocated for principal (the actual loan amount) will increase, however, the amount you pay in interest will go down accordingly. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on a fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (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'd love to 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 kinds of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they won't go up above a certain amount in a given period of time. 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 though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment won't go above a certain amount in a given year. In addition, almost all ARM programs have a "lifetime cap" — your interest rate won't go over the cap amount.
ARMs most often have the lowest rates at the beginning. They usually provide that rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit people who plan to move before the initial lock expires.
You might choose an ARM to get a very low introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values decrease and borrowers can't sell their home or refinance their loan.
Have questions about mortgage loans? Call us at 3103737406. It's our job to answer these questions and many others, so we're happy to help!