Differences between adjustable and fixed loans

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A fixed-rate loan features a fixed payment over the life of the mortgage. The property taxes and homeowners insurance will go up over time, but for the most part, payment amounts on these types of loans don't increase much.

Early in a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller percentage toward principal. The amount applied to your principal amount increases up slowly every month.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Dick Lepre at (415) 244-9383 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in one period. Almost all ARMs also cap your rate over the life of the loan.

ARMs most often feature their lowest, most attractive rates toward the start. They usually guarantee that rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the loan adjusts.

You might choose an ARM to get a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky if property values decrease and borrowers are unable to 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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