Fixed versus adjustable loans

A fixed-rate loan features the same payment amount over the life of your loan. The property tax and homeowners insurance which are almost always part of the payment 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 pays interest, and a much smaller percentage toward principal. That reverses as the loan ages.

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

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted every six months, based on various indexes.

Most programs feature a cap that protects you from sudden monthly payment increases. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees that your payment can't go above a fixed amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan period.

ARMs usually start out at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set 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. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky when property values decrease 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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