Adjustable versus fixed loans

With a fixed-rate loan, your payment doesn't change for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally monthly payments for a fixed-rate mortgage will be very stable.

When you first take out a fixed-rate loan, the majority the payment goes toward interest. As you pay , more of your payment is applied to principal.

You might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Budica Financial Corporation at (951)840-4188 for details.

There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, which means they can't increase over a specified amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment will not go above a certain amount in a given year. Most ARMs also cap your interest rate over the life of the loan.

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 introductory rate is fixed 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 after the initial period. Loans like this are often best for people who anticipate moving within three or five years. These types of ARMs are best for borrowers who plan to move before the loan adjusts.

You might choose an ARM to get a very low initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. 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 at the lower property value.

Have questions about mortgage loans? Call us at (951)840-4188. It's our job to answer these questions and many others, so we're happy to help!