Differences between fixed and adjustable rate loans

With a fixed-rate loan, your monthly payment doesn't change for the life of your loan. The portion that goes to your principal (the loan amount) will increase, however, your interest payment will go down accordingly. The property tax and homeowners insurance will increase over time, but in general, payments on fixed rate loans change little over the life of the loan.

Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller part toward principal. As you pay , more of your payment is applied to principal.

You can 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 this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability 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 good rate. Call Dick Lepre at (415) 244-9383 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. Generally, interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in one period. Plus, almost all ARMs feature a "lifetime cap" — the interest rate can never go over the cap percentage.

ARMs usually start out at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the 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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