Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment over the life of the mortgage. The property taxes and homeowners insurance will go up over time, but in general, payments on these types of loans vary little.

When you first take out a fixed-rate loan, the majority your payment goes toward interest. This proportion gradually reverses itself as the loan ages.

You can choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an 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 help you lock in a fixed-rate at a favorable rate. Call Reliance Mortgage Service, Inc at 562 320-0510 for details.

There are many different types of Adjustable Rate Mortgages. Generally, interest on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can increase in one period. Most ARMs also cap your rate over the life of the loan period.

ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are often best for people who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan on remaining in the house for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 562 320-0510. It's our job to answer these questions and many others, so we're happy to help!

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