Fixed versus adjustable loans

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With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The amount of the payment that goes to principal (the amount you borrowed) goes up, however, your interest payment will decrease accordingly. The property taxes and homeowners insurance will go up over time, but generally, payments on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount applied to principal increases up gradually each month.

You might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love 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 even more varieties. Generally, the interest on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment will not go above a fixed amount in a given year. In addition, almost all adjustable programs feature a "lifetime cap" — the rate can't go over the capped percentage.

ARMs most often have their lowest rates at the beginning. They guarantee that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then 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 programs most benefit borrowers who plan to move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to remain in the house longer than this introductory low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell or refinance.

Have questions about mortgage loans? Call us at (415) 244-9383. We answer questions about different types of loans every day.

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