Fixed versus adjustable loans

A fixed-rate loan features the same payment for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on these types of loans vary little.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. This proportion gradually reverses itself as the loan ages.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Dick Lepre at (415) 244-9383 to discuss your situation with one of our professionals.

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

Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment won't increase beyond a certain amount in a given year. Additionally, almost all adjustable programs have a "lifetime cap" — the rate can't exceed the capped percentage.

ARMs usually start out at a very low rate that may increase over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are usually best for borrowers who expect to move within three or five years. These types of ARMs benefit people who will move before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to stay in the home longer than the initial low-rate period. ARMs can be risky when property values decrease and borrowers can't 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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