Fixed versus adjustable rate loans

With a fixed-rate loan, your payment stays the same for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but in general, payment amounts on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. This proportion gradually reverses itself as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in 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. ARMs are normally adjusted every six months, based on various indexes.

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a 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 payment can increase in a given period. Almost all ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature their lowest, most attractive rates at the beginning. They usually provide that interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for borrowers who will move before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on staying in the home longer than this 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 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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