Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of your loan. The amount that goes to principal (the actual loan amount) increases, however, the amount you pay in interest will decrease in the same amount. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller part goes to principal. As you pay on the loan, more of your payment goes toward principal.

Borrowers might 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 this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Dick Lepre at (415) 244-9383 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, so they won't increase above a specified amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that ensures that your payment will not go above a fixed amount in a given year. Almost all ARMs also cap your rate over the duration of the loan period.

ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate programs most benefit people who plan to move before the initial lock expires.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers can't sell their home or refinance their loan.

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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