Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment over the life of the mortgage. The property taxes and homeowners insurance will increase over time, but generally, payments on these types of loans change little over the life of the loan.

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part goes to principal. As you pay on the loan, more of your payment is applied to 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 wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Statewide Funding at (415) 456-7802 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most ARMs are capped, which means they won't go up over a specific amount in a given period of time. Some ARMs can't adjust more than 2% 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 payment can increase in a given period. The majority of ARMs also cap your interest rate over the life of the loan.

ARMs usually start at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to get a lower initial rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values go down and borrowers are unable to sell their home 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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