Fixed versus adjustable loans
A fixed-rate loan features the same payment amount over the life of the loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans vary little.
When you first take out a fixed-rate mortgage loan, the majority the payment is applied to interest. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low rate. People select 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 provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Riviera Funding NMLS#861382 CA DRE Broker #01186669 at 3103737406 to learn more.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most programs feature a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment can't go above a certain amount in a given year. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs most often feature their lowest rates toward the start of the loan. They provide the lower rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For 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 they adjust. These loans are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will move before the initial lock expires.
Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to stay in the home for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they can't sell or refinance at the lower property value.
Have questions about mortgage loans? Call us at 3103737406. We answer questions about different types of loans every day.