Fixed versus adjustable rate loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments on your fixed-rate loan will increase very little.

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part toward principal. The amount paid toward your principal amount increases up slowly every month.

You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans because interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at the best rate currently available. Call Norcal Capital Group, Inc at (650) 689-5684 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs are capped, so they won't increase over a specified amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment will not go above a certain amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan.

ARMs most often have their lowest, most attractive rates at the start of the loan. They provide that interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 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 they adjust. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the initial lock expires.

You might choose an ARM to get a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance their loan.

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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