Fixed versus adjustable rate loans

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

Early in a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller percentage toward principal. As you pay on the loan, more of your payment goes toward principal.

You can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they want to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Statewide Funding at (415) 456-7802 to discuss your situation with one of our professionals.

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most ARM programs have a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in a given period. Plus, almost all ARM programs have a "lifetime cap" — the rate can't ever go over the cap percentage.

ARMs most often have the lowest rates at the start of the loan. They usually provide 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 initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who expect to move in three or five years. These types of ARMs most benefit people who will move before the initial lock expires.

You might choose an ARM to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs are risky when property values go down and borrowers are unable to sell or refinance.

Have questions about mortgage loans? Call us at (415) 456-7802. It's our job to answer these questions and many others, so we're happy to help!

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