Fixed versus adjustable loans

With a fixed-rate loan, your payment stays the same for the entire duration of the mortgage. The amount of the payment allocated to your principal (the actual loan amount) increases, but the amount you pay in interest will go down accordingly. The property tax and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans vary little.

When you first take out a fixed-rate loan, most of the payment is applied to interest. This proportion reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call Nationwide Home Loans at (562) 693-5048 to learn more.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by a federal index. A few of these are: the 6-month 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 ARMs feature this cap, which means they can't increase over a specified amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can go up in one period. Plus, almost all adjustable programs feature a "lifetime cap" — this cap means that your interest rate won't exceed the cap amount.

ARMs usually start at a very low rate that may increase over time. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are best for people who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at (562) 693-5048. We answer questions about different types of loans every day.

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