Differences between adjustable and fixed rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of the loan. The property tax and homeowners insurance will increase over time, but generally, 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 mostly to pay interest. As you pay , more of your payment is applied to principal.

You can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more 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 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. ARMs are generally adjusted every six months, based on various indexes.

Most Adjustable Rate Mortgages are capped, so they won't increase over a certain amount in a given period. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent per year, even though the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can increase in one period. Most ARMs also cap your rate over the life of the loan.

ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of ARMs are best for people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a very low initial interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers cannot sell 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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