Differences between adjustable and fixed loans

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A fixed-rate loan features the same payment for the entire duration of your loan. The property taxes and homeowners insurance will increase over time, but for the most part, payments on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. That gradually reverses as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a good rate. Call Dick Lepre at (415) 244-9383 for details.

There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most ARMs feature this cap, so they can't go up over a certain amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in a given period. The majority of ARMs also cap your rate over the duration of the loan period.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they cannot sell their home or refinance at the lower property value.

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