Fixed versus adjustable rate loans

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

At the beginning of a a fixed-rate loan, most of the payment is applied to interest. That reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good 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 even more varieties. ARMs are generally adjusted every six months, based on various indexes.

Most programs feature a "cap" that protects you from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment won't go above a fixed amount over the course of a given year. Additionally, almost all ARM programs have a "lifetime cap" — the rate will never exceed the cap amount.

ARMs most often have their lowest, most attractive rates at the start. They provide that rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an ARM to get a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. 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. It's our job to answer these questions and many others, so we're happy to help!

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