Differences between adjustable and fixed loans

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With a fixed-rate loan, your payment never changes for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments for your fixed-rate mortgage will increase very little.

At the beginning of a a fixed-rate loan, most of the payment goes toward interest. This proportion reverses as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Dick Lepre at (415) 244-9383 to discuss how we can help.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 Adjustable Rate Mortgages feature this cap, which means they can't increase above a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in a given period. Most ARMs also cap your rate over the duration of the loan.

ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 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. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit people who plan to move before the loan adjusts.

You might choose an ARM to get a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell or refinance with a lower property value.

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