Adjustable versus fixed loans

A fixed-rate loan features the same payment amount for the entire duration of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on these types of loans vary little.

When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. That gradually reverses itself as the loan ages.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when 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 offer 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 even more varieties. Generally, the interest rates on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can go up in one period. Almost all ARMs also cap your interest rate over the duration of the loan.

ARMs most often feature their lowest rates toward the start. They provide that rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed 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. These loans are best for borrowers who expect to move in three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan on staying in the house longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (415) 244-9383. It's our job to answer these questions and many others, so we're happy to help!

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