Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans change little over the life of the loan.

When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. The amount applied to principal increases up gradually every month.

You can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Norcal Capital Group, Inc at (650) 689-5684 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest on ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, 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. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment can't increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature the lowest, most attractive rates at the start of the loan. They usually guarantee that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates when they cannot sell their home or refinance with a 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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