Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment over the life of your mortgage. The property taxes 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.

When you first take out a fixed-rate mortgage loan, most of your payment goes toward interest. As you pay , more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Real Property Finance at 310-379-5997 to learn more.

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

The majority of ARMs are capped, so they won't increase over a specified amount in a given period of time. Some ARMs won't increase more than two percent 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 payment can go up in a given period. The majority of ARMs also cap your rate over the life of the loan period.

ARMs most often feature the lowest, most attractive rates at the start of the loan. They usually provide that rate for an initial period that varies greatly. 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 they adjust after the initial period. These loans are usually best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who will move before the initial lock expires.

Most people who choose ARMs do so because they want to get lower introductory rates and don't plan on remaining in the house for any longer than the initial low-rate period. ARMs are risky when property values decrease and borrowers are unable to sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 310-379-5997. It's our job to answer these questions and many others, so we're happy to help!

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