Differences between adjustable and fixed loans

A fixed-rate loan features the same payment over the life of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller part toward principal. That reverses itself as the loan ages.

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

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment will not increase beyond a fixed amount in a given year. In addition, almost all ARM programs feature a "lifetime cap" — your rate won't exceed the cap percentage.

ARMs most often feature the lowest, most attractive rates at the start of the loan. They provide the lower 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 fixed for three or five years. After this period it 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 expect to move in three or five years. These types of ARMs benefit people who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to get a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values decrease and borrowers cannot sell or refinance their loan.

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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