Fixed versus adjustable rate loans

A fixed-rate loan features the same payment for the entire duration of your mortgage. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans don't increase much.

When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. That reverses itself as the loan ages.

You can choose a fixed-rate loan in order to lock in a low interest rate. People choose fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Dick Lepre at (415) 244-9383 to discuss your situation with one of our professionals.

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

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

ARMs most often feature their lowest rates toward the beginning. They usually provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the initial lock expires.

Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan to stay in the house for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell or refinance with a 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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