Fixed versus adjustable loans

A fixed-rate loan features a fixed payment for the entire duration of the mortgage. The property tax and homeowners insurance will increase over time, but generally, payments on these types of loans vary little.

At the beginning of a a fixed-rate loan, most of the payment is applied to interest. This proportion reverses as the loan ages.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Norcal Capital Group, Inc at (650) 689-5684 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 a federal 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 Adjustable Rate Mortgages feature this cap, which means they won't go up over a specific amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than a couple percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment can't go above a fixed amount over the course of a given year. Plus, the great majority of adjustable programs have a "lifetime cap" — your rate can't go over the cap percentage.

ARMs usually start at a very low rate that usually increases over time. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for borrowers who anticipate moving within three or five years. These types of ARMs benefit people who plan to move before the loan adjusts.

Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the home longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (650) 689-5684. We answer questions about different types of loans every day.

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