Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for your fixed-rate mortgage will be very stable.

When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. As you pay , more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan to lock in a low rate. People 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 into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Dick Lepre at (415) 244-9383 for details.

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most Adjustable Rate Mortgages are capped, so they won't increase over a specific amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" which ensures your payment will not go above a fixed amount in a given year. Most ARMs also cap your rate over the life of the loan.

ARMs most often have the lowest rates toward the start. They usually provide that interest rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial 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. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.

You might choose an ARM to get a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky if property values go down and borrowers cannot sell their home 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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