Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment doesn't change for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts for a fixed-rate loan will be very stable.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount applied to your principal amount increases up slowly each month.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers choose these types of loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with 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 Statewide Funding at (415) 456-7802 to discuss how we can help.

There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most ARMs feature this cap, so they can't go up over a certain amount in a given period of time. Some ARMs can'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 directly, caps the amount that your payment can increase in one period. Most ARMs also cap your interest rate over the duration of the loan period.

ARMs usually start at a very low rate that usually increases as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit borrowers who will move before the initial lock expires.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan to stay in the house longer than this initial low-rate period. ARMs are risky when property values go down and borrowers cannot sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (415) 456-7802. We answer questions about different types of loans every day.

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