Fixed versus adjustable loans
A fixed-rate loan features a fixed payment for the entire duration 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 your fixed-rate mortgage will increase very little.
At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. That gradually reverses as the loan ages.
Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Real Property Finance at 310-379-5997 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, so they can't go up above a certain amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment will not go above a certain amount in a given year. In addition, almost all ARMs have a "lifetime cap" — this cap means that your rate can't ever exceed the capped amount.
ARMs most often have the lowest rates at the beginning. They usually provide the lower interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are best for people who expect to move within three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.
You might choose an ARM to take advantage of a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky if property values go down and borrowers are unable to sell their home 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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