Differences between fixed and adjustable loans

With a fixed-rate loan, your payment remains the same for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts on a fixed-rate mortgage will increase very little.

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

You can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad 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.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, interest rates on ARMs are determined by a federal index. Some examples of outside indexes 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.

The majority of ARMs feature this cap, so they won't go up above a specific amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment can't go above a fixed amount over the course of a given year. In addition, almost all adjustable programs feature a "lifetime cap" — this means that the interest rate won't go over the cap amount.

ARMs most often feature their lowest, most attractive rates at the start of the loan. They usually provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to get a very low introductory rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell their home or refinance at the 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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