Fixed versus adjustable loans

With a fixed-rate loan, your payment remains the same for the entire duration of the loan. The amount of the payment allocated for your principal (the amount you borrowed) increases, but the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance will go up over time, but for the most part, payments on these types of loans vary little.

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

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Riviera Funding NMLS#861382 CA DRE Broker #01186669 at 3103737406 to learn more.

There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most programs feature a cap that protects you from sudden monthly payment increases. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in one period. Plus, almost all adjustable programs have a "lifetime cap" — this cap means that the rate will never go over the cap percentage.

ARMs most often feature their lowest rates at the start of the loan. They usually provide that interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of ARMs benefit people who will move before the loan adjusts.

You might choose an ARM to take advantage of a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell their home or refinance at the lower property value.

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!