Adjustable versus fixed loans

A fixed-rate loan features a fixed payment over the life of your loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on your fixed-rate mortgage will be very stable.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage toward principal. That gradually reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. 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 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 are generally adjusted every six months, based on various indexes.

Most programs feature a "cap" that protects you from sudden monthly payment increases. Your ARM may feature a cap on interest rate variances 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" that ensures that your payment will not increase beyond a fixed amount in a given year. Additionally, the great majority of adjustable programs feature a "lifetime cap" — this cap means that your interest rate won't exceed the cap percentage.

ARMs most often feature their lowest rates at the start. They guarantee that rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set 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 best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on staying in the home longer than this initial low-rate period. ARMs can be risky when property values decrease and borrowers are unable to sell or refinance.

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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