Differences between fixed and adjustable loans

A fixed-rate loan features a fixed payment over the life of the loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on fixed rate loans change little over the life of the loan.

Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. The amount applied to principal increases up gradually each month.

You might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Dick Lepre at (415) 244-9383 to discuss your situation with one of our professionals.

There are many different types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, 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. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can go up in a given period. Additionally, the great majority of ARM programs feature a "lifetime cap" — your interest rate can't ever exceed the capped percentage.

ARMs usually start out at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for people who expect to move within three or five years. These types of ARMs benefit people who plan to sell their house or refinance before the initial lock expires.

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

Have questions about mortgage loans? Call us at (415) 244-9383. It's our job to answer these questions and many others, so we're happy to help!

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