Adjustable versus fixed loans

With a fixed-rate loan, your payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on fixed rate loans don't increase much.

At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. The amount paid toward your principal amount increases up gradually every month.

You can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call Riviera Funding NMLS#861382 CA DRE Broker #01186669 at 3103737406 for details.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have 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 underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in a given period. Almost all ARMs also cap your rate over the duration of the loan.

ARMs usually start at a very low rate that may increase over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are often best for borrowers 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 do so when they want to get lower introductory rates and do not plan on remaining in the house longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell their home 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.