Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Dick Lepre at (415) 244-9383 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can increase in a given period. Most ARMs also cap your interest rate over the duration of the loan.

ARMs most often feature the lowest, most attractive rates toward the start. They provide that interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of ARMs benefit borrowers who will move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the house for any longer than this introductory low-rate period. ARMs are risky if property values go down and borrowers cannot sell 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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