Fixed Vs. Adjustable Loans

Fixed-rate mortgage and adjustable-rate mortgage (ARM) are two common types of mortgage loans, each with its own characteristics and considerations. Here's a comparison of fixed-rate and adjustable-rate mortgage loan types:

Fixed-Rate Mortgage (FRM): A fixed-rate mortgage loan is characterized by an interest rate that remains constant throughout the loan term. The key features of a fixed-rate mortgage include:

  1. Predictable Payments: With a fixed-rate mortgage, the monthly principal and interest payments remain the same for the entire loan term. This provides stability and predictability for homeowners, as they can plan their budget without worrying about fluctuating payments.
  2. Interest Rate Stability: The interest rate on a fixed-rate mortgage is locked in at the time of loan origination and does not change over the life of the loan, regardless of market conditions. This provides protection against rising interest rates, which can be beneficial for borrowers who prefer long-term stability and want to avoid potential payment increases.
  3. Longer Loan Terms: Fixed-rate mortgages often have loan terms of 15, 20, or 30 years, allowing borrowers to spread out their payments over an extended period. This can result in lower monthly payments compared to shorter-term loans.
  4. Higher Initial Rates: The interest rates on fixed-rate mortgages tend to be higher initially compared to the initial rates of adjustable-rate mortgages. However, the benefit is that the interest rate remains fixed for the entire loan term, providing borrowers with peace of mind and protection against potential interest rate increases in the future.

Adjustable-Rate Mortgage (ARM): An adjustable-rate mortgage, as the name suggests, has an interest rate that can change over time. The key features of an adjustable-rate mortgage include:

  1. Initial Lower Rates: Adjustable-rate mortgages often offer lower interest rates compared to fixed-rate mortgages, especially during the initial fixed-rate period. This can result in lower monthly payments for borrowers during the initial years of the loan.
  2. Rate Adjustment Periods: ARMs typically have a fixed-rate period at the beginning of the loan, during which the interest rate remains unchanged. After the fixed-rate period ends, the interest rate adjusts periodically, typically on an annual basis. The adjustment is based on a benchmark index, such as the London Interbank Offered Rate (LIBOR), Secured Overnight Financing Rate (SOFR), Cost of Funds Index (COFI) or the U.S. Treasury index, plus a margin set by the lender.
  3. Interest Rate Caps: ARMs often have caps that limit the amount the interest rate can change during a specific time period or over the life of the loan. These caps provide borrowers with some protection against significant interest rate increases.
  4. Potential Rate Fluctuations: With an adjustable-rate mortgage, the monthly mortgage payment can increase or decrease when the interest rate adjusts. The payment fluctuations are based on changes in the benchmark index, and the borrower's monthly payment may become higher or lower depending on market conditions.
  5. Shorter Loan Terms: Adjustable-rate mortgages often have shorter loan terms, such as 3, 5, 7, or 10 years. After the initial fixed-rate period, the loan may fully adjust annually or semi-annually until the loan is paid off or the borrower refinances.

Choosing between a fixed-rate mortgage and an adjustable-rate mortgage depends on various factors, including personal financial goals, risk tolerance, and market conditions. Fixed-rate mortgages provide stability and predictability, while adjustable-rate mortgages offer lower initial rates and potential flexibility. It's important for borrowers to carefully evaluate their financial situation, long-term plans, and consult with Mission Pacific Mortgage to determine which mortgage type aligns with their needs and financial plan.

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