Fixed versus adjustable loans

A fixed-rate loan features the same payment amount over the life of the mortgage. 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 a fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount applied to principal goes up slowly every month.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability 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 how we can help.

There are many types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, which means they won't increase above a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment won't increase beyond a certain amount in a given year. Additionally, almost all ARM programs feature a "lifetime cap" — this cap means that the rate won't exceed the cap amount.

ARMs usually start out at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values go down and borrowers can't sell 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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