Differences between adjustable and fixed loans

A fixed-rate loan features the same payment amount over the life of your mortgage. 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 your fixed-rate mortgage will be very stable.

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

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Norcal Capital Group, Inc at (650) 689-5684 to learn more.

There are many different types of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by a federal index. Some examples of outside indexes 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 programs feature a "cap" that protects borrowers from sudden increases in monthly payments. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even if the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in a given period. Almost all ARMs also cap your rate over the life of the loan period.

ARMs usually start at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 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 3 or 5 years, then they adjust after the initial period. These loans are often best for people who expect to move within three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky when property values decrease 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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