Differences between adjustable and fixed loans

With a fixed-rate loan, your payment stays the same for the entire duration of the mortgage. The portion of the payment that goes for your principal (the amount you borrowed) will increase, however, the amount you pay in interest will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but generally, payments on these types of loans vary little.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. As you pay , more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a favorable rate. Call Norcal Capital Group, Inc at (650) 689-5684 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs usually adjust every six months, based on various indexes.

Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that guarantees your payment won't increase beyond a certain amount in a given year. Additionally, the great majority of ARM programs feature a "lifetime cap" — this cap means that your interest rate can't ever go over the capped amount.

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

Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the home longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if 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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