Adjustable versus fixed loans

A fixed-rate loan features the same payment for the entire duration of the loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on these types of loans change little over the life of the loan.

When you first take out a fixed-rate mortgage loan, the majority your payment is applied to interest. That reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Riviera Funding at (310) 373-7406 to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-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. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures your payment will not go above a fixed 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 may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are best for people who anticipate moving within three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to remain in the home for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell their home or refinance at the lower property value.