Differences between adjustable and fixed rate loans

With a fixed-rate loan, your monthly payment stays the same for the life of the mortgage. 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 go up over time, but in general, payments on fixed rate loans change little over the life of the loan.

Early in a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller percentage goes to principal. The amount paid toward your principal amount goes up slowly each month.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in this lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Norcal Capital Group, Inc at 6507631924 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest rates on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs are capped, which means they can't go up above a certain amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees that your payment can't increase beyond a fixed amount over the course of a given year. Almost all ARMs also cap your rate over the duration of the loan period.

ARMs usually start out at a very low rate that may increase over time. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are usually best for people who anticipate moving in three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the home for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at 6507631924. It's our job to answer these questions and many others, so we're happy to help!

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Norcal Capital Group, Inc

1369 El Camino Real
Millbrae, CA 94030