Differences between adjustable and fixed rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payment amounts on your fixed-rate mortgage will increase very little.

During the early amortization period of a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage toward principal. That gradually reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Norcal Capital Group, Inc at (650) 689-5684 for details.

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

The majority of Adjustable Rate Mortgages feature this cap, so they won't increase over a specific 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 per year, even if the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can go up in a given period. Almost all ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature their lowest rates toward the beginning of the loan. They guarantee that rate for an initial period that varies greatly. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and don't plan to remain in the house for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they cannot sell or refinance at the lower property value.

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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