Adjustable versus fixed loans
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A fixed-rate loan features a fixed payment amount for the entire duration of the loan. The property taxes and homeowners insurance will increase over time, but in general, payments on these types of loans don't increase much.
At the beginning of a a fixed-rate mortgage loan, the majority your payment goes toward interest. As you pay , more of your payment is applied to principal.
You might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in at the lower rate. If you have an Adjustable Rate Mortgage (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 discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs are normally adjusted every six months, based on various indexes.
The majority of ARMs feature this cap, which means they won't go up above a specific amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your payment can go up in one period. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often have their lowest, most attractive rates at the start. They guarantee the lower rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers 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 remaining in the home longer than the initial low-rate period. ARMs are risky if property values go down and borrowers cannot sell or refinance.
Have questions about mortgage loans? Call us at (415) 244-9383. We answer questions about different types of loans every day.