Differences between adjustable and fixed loans

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With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the loan. 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. For the most part payments on your fixed-rate mortgage will be very stable.

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

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call Empower Lending Group at 310-686-1313 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, interest for ARMs are based on an outside index. A few of these are: the 6-month 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 borrowers from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures that your payment will not go above a certain amount over the course of a given year. Most ARMs also cap your rate over the life of the loan.

ARMs usually start out at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set 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 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 programs benefit people who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on staying in the house longer than this initial low-rate period. ARMs can be risky if property values decrease and borrowers are unable to sell or refinance their loan.

Have questions about mortgage loans? Call us at 310-686-1313. We answer questions about different types of loans every day.

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