Differences between adjustable and fixed loans

A fixed-rate loan features the same payment over the life of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay , more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low interest rate. People select 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 into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Reliance Mortgage Service, Inc at 562 320-0510 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a cap that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in a given period. Most ARMs also cap your rate over the life of the loan period.

ARMs most often have the lowest, most attractive rates at the start of the loan. They usually provide that interest rate for an initial period that varies greatly. You may hear people talking 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 types of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the loan adjusts.

You might choose an ARM to get a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values go down and borrowers can't sell their home 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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