Differences between fixed and adjustable loans

With a fixed-rate loan, your monthly payment doesn't change for the life of your loan. The portion allocated to your principal (the amount you borrowed) will go up, however, your interest payment will go down in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payment amounts for your fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay , more of your payment goes toward principal.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call Statewide Funding at (415) 456-7802 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a "cap" that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in a given period. The majority of ARMs also cap your rate over the life of the loan.

ARMs most often feature their lowest rates toward the start of the loan. They provide the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set 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. Loans like this are often best for borrowers who expect to move within three or five years. These types of ARMs benefit people who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the home for any longer than this introductory low-rate period. ARMs are risky when property values decrease 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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