Adjustable versus fixed loans
With a fixed-rate loan, your payment doesn't change for the entire duration of your loan. The portion of the payment allocated for principal (the loan amount) increases, however, the amount you pay in interest will go down accordingly. 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 fixed rate loans don't increase much.
During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part goes to principal. The amount applied to your principal amount goes up gradually each month.
You can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Real Property Finance at 310-379-5997 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages feature this cap, so they won't increase above a specified amount in a given period of time. Some ARMs won't increase 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 monthly payment can increase in a given period. Almost all ARMs also cap your interest rate over the duration of the loan period.
ARMs most often have their lowest, most attractive rates at the beginning of the loan. They provide that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed 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 adjust. Loans like this are best for people who expect to move in three or five years. These types of ARMs are best for people who will sell their house or refinance before the initial lock expires.
You might choose an ARM to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values decrease and borrowers are unable to sell or refinance their loan.
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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