Adjustable versus fixed loans

A fixed-rate loan features the same payment amount over the life of your loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but in general, payments on these types of loans vary little.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount applied to your principal amount increases up gradually every month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate 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 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 Custom Lending Group at (707) 252-2700 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs usually adjust twice a year, based on various indexes.

Most ARM programs feature a "cap" that protects borrowers from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount your monthly payment can increase in one period. In addition, the great majority of adjustable programs feature a "lifetime cap" — this means that the rate can't go over the cap percentage.

ARMs most often have their lowest rates at the beginning of the loan. They usually guarantee the lower interest 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 fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are often best for people who expect to move in three or five years. These types of ARMs are best for borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the house longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (707) 252-2700. We answer questions about different types of loans every day.

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