Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment remains the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally monthly payments for a fixed-rate mortgage will increase very little.

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

Borrowers might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Norcal Capital Group, Inc at (650) 689-5684 to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest on ARMs are determined by an outside index. A few of these 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 feature this cap, which means they can't increase over a specific amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the monthly payment can increase in a given period. Plus, the great majority of ARM programs have a "lifetime cap" — this means that the interest rate can't ever go over the cap percentage.

ARMs usually start at a very low rate that usually increases over time. 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 a number of years (3 or 5), then they adjust. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than the initial low-rate period. ARMs can be risky when property values go down and borrowers are unable to sell their home or refinance.

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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