Differences between adjustable and fixed rate loans

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A fixed-rate loan features a fixed payment for the entire duration of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for a fixed-rate loan will increase very little.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage goes to principal. The amount paid toward your principal amount increases up slowly each month.

You can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call Dick Lepre at (415) 244-9383 to learn more.

There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, which means they can't increase above a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which ensures your payment can't go above a fixed amount over the course of a given year. Additionally, the great majority of ARMs feature a "lifetime cap" — the rate can never go over the capped percentage.

ARMs most often feature their lowest rates at the beginning. They usually provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In 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 adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the home for any longer than this introductory low-rate period. ARMs are risky when property values decrease and borrowers can't sell their home or refinance.

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