Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. This proportion reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Reliance Mortgage Service, Inc at 562 320-0510 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages are capped, so they won't increase over a certain amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment won't increase beyond a fixed amount over the course of a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — the interest rate won't go over the cap percentage.

ARMs most often have the lowest, most attractive rates toward the start of the loan. They guarantee the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell their home or refinance with a lower property value.

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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