Differences between adjustable and fixed loans

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A fixed-rate loan features the same payment over the life of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part payments on your fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Dick Lepre at (415) 244-9383 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust every six months, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, so they can't increase over a specific amount in a given period of time. Some ARMs won't adjust more than two percent 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 your payment can increase in one period. Almost all ARMs also cap your rate over the life of the loan.

ARMs most often feature the lowest rates toward the start of the loan. They provide the lower interest rate from a month to ten years. You've probably read about 5/1 or 3/1 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 3 or 5 years, then they adjust after the initial period. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the initial lock expires.

You might choose an ARM to take advantage of a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell their home or refinance at the lower property value.

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