Differences between adjustable and fixed rate loans

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

Your first few years of payments on a fixed-rate loan go primarily toward interest. This proportion gradually reverses as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Dick Lepre at (415) 244-9383 to learn more.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 are capped, so they won't go up above a specific 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 guarantees your payment won't go above a fixed amount in a given year. Additionally, almost all ARM programs have a "lifetime cap" — the interest rate won't go over the cap percentage.

ARMs most often feature the lowest rates toward the beginning of the loan. They usually guarantee the lower interest rate from a month to ten years. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. Loans like this are often best for people who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who plan to move before the loan adjusts.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan to remain in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they can't sell their home or refinance at the lower property value.

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