Adjustable versus fixed rate loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on these types of loans don't increase much.

When you first take out a fixed-rate loan, most of your payment goes toward interest. That reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Nationwide Home Loans at (562) 693-5048 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are generally adjusted every six months, based on various indexes.

Most programs feature a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per 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 rate directly, caps the amount that your monthly payment can go up in a given period. Plus, the great majority of ARM programs feature a "lifetime cap" — the rate can't ever go over the capped amount.

ARMs most often have their lowest rates at the beginning of the loan. They usually provide that interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of ARMs benefit people who will move before the loan adjusts.

You might choose an ARM to take advantage of a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot 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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