Differences between fixed and adjustable loans

A fixed-rate loan features the same payment amount over the life of your mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on a fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. This proportion gradually reverses itself as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad 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 different types of Adjustable Rate Mortgages. Generally, the interest on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a cap that protects you from sudden increases in monthly payments. 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 per year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment will not go above a certain amount in a given year. Plus, the great majority of adjustable programs feature a "lifetime cap" — this cap means that the rate can't exceed the capped percentage.

ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who expect to move within three or five years. These types of ARMs are best for people who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the home for any longer than this initial low-rate period. ARMs are risky when property values decrease and borrowers can't sell or refinance.

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!

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