Differences between fixed and adjustable loans

With a fixed-rate loan, your monthly payment never changes for the life of your loan. The amount that goes for your principal (the amount you borrowed) will go up, however, your interest payment will decrease in the same amount. The property tax and homeowners insurance will go up over time, but in general, payments on fixed rate loans change little over the life of the loan.

At the beginning of a a fixed-rate loan, the majority your payment goes toward interest. The amount paid toward principal goes up gradually every month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because 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 greater consistency in monthly payments. If you have an Adjustable-Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call HERNA CAPITAL LLC. at (626)918-4592 to learn more.

There are many different types of Adjustable-Rate Mortgages. 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 how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment can't go above a fixed amount over the course of a given year. Additionally, almost all adjustable programs feature a "lifetime cap" — the interest rate can't go over the capped percentage.

ARMs most often have the lowest rates at the beginning. They usually provide the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are best for borrowers who expect to move within three or five years. These types of adjustable rate loans are best for borrowers who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values decrease and borrowers are unable to sell their home or refinance their loan.

Have questions about mortgage loans? Call us at HERN CAPITAL LLC.  (626)918-4592. It's our job to answer these questions and many others, so we're happy to help!