Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the mortgage. The amount of the payment that goes to your principal (the actual loan amount) will increase, but your interest payment will decrease in the same amount. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate loan will increase very little.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller percentage toward principal. That gradually reverses as the loan ages.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Riviera Funding NMLS#861382 CA DRE Broker #01186669 at 3103737406 to discuss your situation with one of our professionals.
There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.
Most programs have 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 feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in a given period. Additionally, the great majority of adjustable programs have a "lifetime cap" — your interest rate can't ever exceed the capped percentage.
ARMs usually start out at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for people who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on remaining in the home longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at 3103737406. We answer questions about different types of loans every day.