Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. That gradually reverses as the loan ages.

Borrowers can choose a fixed-rate loan in order 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. For homeowners who have an ARM now, refinancing with 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 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest rates on ARMs are determined by 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.

Most Adjustable Rate Mortgages are capped, so they can't increase above 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 a year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in one period. Most ARMs also cap your interest rate over the life of the loan.

ARMs most often have their lowest rates toward the beginning. They provide the lower rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for people who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't 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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