Differences between fixed and adjustable loans

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

At the beginning of a a fixed-rate mortgage loan, most of your payment is applied to interest. The amount paid toward your principal amount increases up gradually every month.

Borrowers can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Norcal Capital Group, Inc at (650) 689-5684 to learn more.

There are many kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, so they can't go up over a certain amount in a given period. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can increase in a given period. Additionally, the great majority of ARMs feature a "lifetime cap" — this cap means that the interest rate won't exceed the cap percentage.

ARMs most often feature their lowest, most attractive rates at the start of the loan. They usually guarantee the lower rate for an initial period that varies greatly. You've probably 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 loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are usually best for borrowers who expect to move in three or five years. These types of adjustable rate loans most benefit people who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the home longer than this introductory low-rate period. ARMs are risky when property values go down and borrowers cannot sell or refinance.

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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