Adjustable versus fixed rate loans

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A fixed-rate loan features a fixed payment for the entire duration of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate mortgage will be very stable.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller percentage toward principal. The amount applied to principal goes up slowly every month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Dick Lepre at (415) 244-9383 to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are generally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, so they can't go up over a certain amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment can't increase beyond a certain amount over the course of a given year. In addition, almost all ARMs feature a "lifetime cap" — your rate can't ever go over the cap percentage.

ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types 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 loans are best for borrowers who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so when they want to get lower introductory rates and don't plan to remain in the home longer than the initial low-rate period. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (415) 244-9383. It's our job to answer these questions and many others, so we're happy to help!

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