Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment amount over the life of your mortgage. The property taxes and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage toward principal. The amount paid toward your principal amount goes up slowly each month.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more 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 Reliance Mortgage Service, Inc at 562 320-0510 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest rates for ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a cap that protects you from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees that your payment will not increase beyond a fixed amount in a given year. Most ARMs also cap your rate over the life of the loan.

ARMs usually start 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 set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of ARMs most benefit people who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to stay in the home longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers can't sell or refinance their loan.

Have questions about mortgage loans? Call us at 562 320-0510. We answer questions about different types of loans every day.

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