Adjustable versus fixed loans

A fixed-rate loan features a fixed payment amount for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on these types of loans don't increase much.

When you first take out a fixed-rate loan, the majority your payment is applied to interest. The amount paid toward principal goes up gradually every month.

You 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 the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Real Property Finance at 310-379-5997 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most programs have a cap that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in one period. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs most often feature the lowest, most attractive rates toward the beginning of the loan. They provide that interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for people who plan to 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 don't plan on staying in the house longer than this initial low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell or refinance.

Have questions about mortgage loans? Call us at 310-379-5997. We answer questions about different types of loans every day.

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