Fixed versus adjustable loans

A fixed-rate loan features a fixed payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on your fixed-rate mortgage will increase very little.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a significantly smaller part toward principal. That reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an 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 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 kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment will not go above a certain amount in a given year. Additionally, the great majority of ARM programs have a "lifetime cap" — this means that the interest rate can never go over the capped amount.

ARMs usually start at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, 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 adjustable rate loans most benefit borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to stay in the home for any longer than this introductory low-rate period. ARMs are risky if property values go down and borrowers can't 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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