Differences between fixed and adjustable rate loans

With a fixed-rate loan, your payment doesn't change for the life of your mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on these types of loans vary little.

Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. This proportion gradually reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a favorable rate. Call Dick Lepre at (415) 244-9383 to discuss your situation with one of our professionals.

There are many kinds of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.

Most Adjustable Rate Mortgages are capped, which means they can't increase above a certain amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the index the rate is based on goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment won't go above a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the life of the loan period.

ARMs usually start at a very low rate that usually increases over time. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate programs most benefit people who will move before the initial lock expires.

Most people who choose ARMs choose them when they want to take advantage of lower introductory rates and do not plan to remain in the home for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they can't sell their home or refinance at the 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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