Differences between adjustable and fixed loans

A fixed-rate loan features the same payment amount over the life of your mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. This proportion gradually reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose 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 can help you lock in a fixed-rate at the best rate currently available. Call Budica Financial Corporation at (951)840-4188 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust every six months, based on various indexes.

Most ARM programs have a cap that protects borrowers from sudden increases in monthly payments. 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 if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment will not increase beyond a fixed amount over the course of a given year. Plus, the great majority of adjustable programs feature a "lifetime cap" — the interest rate can't ever exceed the capped amount.

ARMs most often feature the lowest, most attractive rates toward the start. They provide that rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for people who expect to move within three or five years. These types of ARMs are best for people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky if property values decrease and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at (951)840-4188. We answer questions about different types of loans every day.