Adjustable versus fixed loans

A fixed-rate loan features a fixed payment amount over the life of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments on a fixed-rate mortgage will increase very little.

During the early amortization period of a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller percentage goes to principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers might 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 lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a good rate. Call Statewide Funding at (415) 456-7802 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, 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 Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, so they can't increase above a specific amount in a given period. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can increase in one period. Plus, almost all ARM programs have a "lifetime cap" — this means that the rate will never exceed the capped amount.

ARMs most often feature their lowest, most attractive rates toward the beginning of the loan. They usually guarantee the lower rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and don't plan to remain in the house for any longer than the initial low-rate period. ARMs are risky if property values go down 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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