Differences between adjustable and fixed loans
A fixed-rate loan features the same payment amount over the life of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate loan, most of your payment goes toward interest. That gradually reverses as the loan ages.
Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Riviera Funding NMLS#861382 CA DRE Broker #01186669 at 3103737406 for details.
There are many different kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a cap that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment won't go above a fixed amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan.
ARMs most often have their lowest, most attractive rates toward the start. They usually provide that interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set 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. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on remaining in the house longer than this introductory low-rate period. ARMs can be risky if property values decrease and borrowers are unable to sell their home or refinance.
Have questions about mortgage loans? Call us at 3103737406. We answer questions about different types of loans every day.