Fixed versus adjustable loans

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A fixed-rate loan features the same payment for the entire duration of the mortgage. The property tax and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. That gradually reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call South Coast Funding at 949-367-1317 to discuss your situation with one of our professionals.

There are many different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

Most programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can increase in a given period. In addition, almost all ARMs feature a "lifetime cap" — the interest rate can't go over the capped amount.

ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who expect to move 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 Adjustable Rate Mortgage to get a very low initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 949-367-1317. It's our job to answer these questions and many others, so we're happy to help!