Differences between fixed and adjustable loans
A fixed-rate loan features the same payment amount over the life of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts on a fixed-rate mortgage will increase very little.
During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a much smaller percentage goes to principal. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer 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 for details.
There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.
Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't go above a certain amount in a given year. Almost all ARMs also cap your rate over the life of the loan period.
ARMs most often feature their lowest rates at the start. They guarantee the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory 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. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky if property values decrease and borrowers can't sell or refinance.
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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