Differences between fixed and adjustable loans

With a fixed-rate loan, your payment remains the same for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on fixed rate loans vary little.

When you first take out a fixed-rate loan, the majority the payment is applied to interest. As you pay , more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Reliance Mortgage Service, Inc at 562 320-0510 to learn more.

There are many types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on 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 increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in one period. In addition, almost all adjustable programs feature a "lifetime cap" — the rate can never go over the cap percentage.

ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will move before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan on staying in the house for any longer than the introductory low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell or refinance.

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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