Differences between adjustable and fixed rate 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 generally, payments on these types of loans vary little.

Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a significantly smaller percentage toward principal. The amount paid toward principal goes up slowly each month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a good rate. Call Dick Lepre at (415) 244-9383 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates for ARMs are based on an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, which means they won't increase over a specific amount in a given period of time. Some ARMs can'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 directly, caps the amount that the monthly payment can go up in one period. Almost all ARMs also cap your interest rate over the life of the loan.

ARMs most often have their lowest rates toward the start. They guarantee the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are often best for people who anticipate moving within three or five years. These types of ARMs are best for borrowers who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a very low initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they can't sell their home 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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