Fixed versus adjustable loans

With a fixed-rate loan, your payment never changes for the entire duration of the loan. The amount of the payment allocated to principal (the amount you borrowed) goes up, but your interest payment will go down in the same amount. The property tax and homeowners insurance will go up over time, but in general, payment amounts on these types of 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 goes toward interest, and a significantly smaller part toward principal. The amount applied to your principal amount goes up slowly each month.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Dick Lepre at (415) 244-9383 to learn more.

There are many different kinds of Adjustable Rate Mortgages. 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. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the payment can increase in one period. Additionally, almost all ARM programs feature a "lifetime cap" — this cap means that your rate can't ever go over the cap amount.

ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 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 certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for people who anticipate moving within three or five years. These types of ARMs most benefit people who will move before the loan adjusts.

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan on staying in the home for any longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers cannot sell or refinance their loan.

Have questions about mortgage loans? Call us at (415) 244-9383. It's our job to answer these questions and many others, so we're happy to help!

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