Differences between fixed and adjustable rate loans

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

When you first take out a fixed-rate loan, the majority your payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Dick Lepre NMLS #302379 at 4152449383 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest rates on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, which means they won't go up above a specified amount in a given period. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which ensures that your payment won't go above a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan period.

ARMs most often feature the lowest, most attractive rates toward the beginning of the loan. They guarantee that rate for an initial period that varies greatly. You may hear people talking 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 loans are fixed for a number of years (3 or 5), then adjust. Loans like this are often best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who will move before the loan adjusts.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on remaining in the home for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell their home or refinance with a lower property value.

Have questions about mortgage loans? Call us at 4152449383. We answer questions about different types of loans every day.

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Dick Lepre NMLS #302379

LendUS, LLC dba RPM Mortgage - NMLS ID #1938

3240 Stone Valley Road West
Alamo, CA 94507