Fixed versus adjustable rate loans

With a fixed-rate loan, your payment remains the same for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts for your fixed-rate loan will be very stable.

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

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want 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 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. ARMs are normally adjusted twice a year, based on various indexes.

Most ARM programs feature a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment can't increase beyond a fixed amount in a given year. In addition, almost all ARMs feature a "lifetime cap" — this means that your interest rate can't ever exceed the capped amount.

ARMs most often feature the lowest rates at the start. They usually guarantee that rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for borrowers who expect to move in three or five years. These types of ARMs benefit borrowers who plan to move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on staying in the home longer than the introductory low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell their home 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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