Differences between adjustable and fixed rate loans

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A fixed-rate loan features the same payment over the life of your loan. The property tax and homeowners insurance will go up over time, but generally, payments on these types of loans vary little.

During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a much smaller percentage goes to principal. The amount applied to principal goes up gradually every month.

You might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, 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 kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

The majority of ARMs feature this cap, so they can't increase above a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can go up in one period. In addition, the great majority of ARMs have a "lifetime cap" — your rate can't go over the capped amount.

ARMs usually start at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to get a lower introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up if they can't sell their home or refinance at the lower property value.

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