Differences between adjustable and fixed rate loans

With a fixed-rate loan, your monthly payment stays the same for the life of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller percentage toward principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans because interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Norcal Capital Group, Inc at (650) 689-5684 to discuss your situation with one of our professionals.

There are many different types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most ARMs are capped, which means they won't go up over a specified amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment will not increase beyond a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan.

ARMs most often have their lowest rates at the beginning. They usually guarantee that interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers can't sell 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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