Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment remains the same for the life of your loan. The amount of the payment allocated to principal (the loan amount) will go up, but the amount you pay in interest will decrease in the same amount. 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 these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay on the loan, more of your payment is applied to principal.
You might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. 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 learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
The majority of ARMs feature this cap, so they can't go up over a specified amount in a given period of time. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment will not go above a fixed amount in a given year. Most ARMs also cap your rate over the life of the loan period.
ARMs usually start out at a very low rate that may increase as the loan ages. You've likely heard of 5/1 or 3/1 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 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an ARM to take advantage of a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are 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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