Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment amount over the life of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts for a fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. That reverses as the loan ages.

Borrowers can choose a fixed-rate loan 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. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love 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 even more varieties. ARMs are normally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, so they won't increase over a specified amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in a given period. Almost all ARMs also cap your rate over the life of the loan.

ARMs usually start at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are often best for people who anticipate moving in three or five years. These types of ARMs most benefit people who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan to stay in the house for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot 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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