Fixed versus adjustable rate loans
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A fixed-rate loan features the same payment over the life of your loan. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount applied to principal increases up gradually each month.
Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in the 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 can help you lock in a fixed-rate at the best rate currently available. Call Pacific Coast Funding at 714 969-3112 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.
Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate variances over the course of a year. 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 has a "payment cap" which ensures your payment will not increase beyond a fixed amount over the course of a given year. Additionally, the great majority of ARM programs feature a "lifetime cap" — this cap means that your interest rate can't exceed the capped amount.
ARMs usually start out at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are usually best for people who anticipate moving within three or five years. These types of ARMs most benefit people who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell or refinance with a lower property value.
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