Fixed versus adjustable loans

A fixed-rate loan features a fixed payment amount over the life of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments on a fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount paid toward your principal amount goes up gradually every month.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Dick Lepre at (415) 244-9383 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most Adjustable Rate Mortgages feature this cap, so they can't increase over a certain amount in a given period of time. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can increase in a given period. In addition, the great majority of adjustable programs have a "lifetime cap" — your interest rate will never exceed the cap percentage.

ARMs most often have the lowest rates toward the start of the loan. They usually guarantee 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 initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are best for borrowers who expect to move in three or five years. These types of ARMs are best for people who will move before the initial lock expires.

Most people who choose ARMs do so when they want to get lower introductory rates and don't plan to stay in the house for any longer than this introductory low-rate period. ARMs can be risky when property values go down and borrowers can't sell or refinance.

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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