Differences between fixed and adjustable loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of the loan. The amount of the payment allocated for principal (the actual loan amount) goes up, but your interest payment will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payments on these types of loans change little over the life of the loan.

When you first take out a fixed-rate loan, most of your payment is applied to interest. As you pay on the loan, more of your payment is applied to principal.

You can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a good rate. Call Statewide Funding at (415) 456-7802 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are normally adjusted every six months, based on various indexes.

Most ARMs are capped, which means they can't increase over a specified amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment won't increase beyond a fixed amount in a given year. Additionally, the great majority of adjustable programs feature a "lifetime cap" — your interest rate will never go over the capped percentage.

ARMs most often have the lowest rates at the beginning. They usually provide that interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types 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 ARMs benefit people who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and don't plan on remaining in the house for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell or refinance with a lower property value.

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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