Adjustable versus fixed loans

With a fixed-rate loan, your payment stays the same for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on a fixed-rate loan will be very stable.

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.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Dick Lepre at (415) 244-9383 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in one period. Additionally, the great majority of adjustable programs have a "lifetime cap" — the rate won't go over the cap amount.

ARMs most often have their lowest rates at the beginning of the loan. They provide that interest rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on remaining in the home for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up if they can't sell their home or refinance at the 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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