Fixed versus adjustable rate loans

With a fixed-rate loan, your payment remains the same for the entire duration of your loan. The amount of the payment that goes for your principal (the actual loan amount) increases, but the amount you pay in interest will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments on a fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount applied to your principal amount increases up slowly each month.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in 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 different kinds of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

Most ARMs feature this cap, which means they can't increase over a certain amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment can't increase beyond a fixed amount in a given year. The majority of ARMs also cap your rate over the life of the loan period.

ARMs most often have their lowest rates toward the beginning. They provide the lower 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. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to stay in the house longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell their home or refinance with a lower property value.

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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