Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.

When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. That gradually reverses itself as the loan ages.

You can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an 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 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.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, so they won't go up over a certain amount in a given period of time. 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 if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in a given period. In addition, almost all ARM programs feature a "lifetime cap" — this means that your interest rate can't ever exceed the capped amount.

ARMs usually start out at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are often best for borrowers who anticipate moving in three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.

Most people who choose ARMs do so because they want to get lower introductory rates and don't plan on remaining in the house longer than the introductory low-rate period. ARMs can be risky if 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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