Fixed versus adjustable rate loans

A fixed-rate loan features a fixed payment for the entire duration of your loan. The property taxes and homeowners insurance will go up over time, but for the most part, payments on these types of loans vary little.

When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. The amount applied to principal goes up slowly each month.

You can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in at the low 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'd love to help you lock in a fixed-rate at a favorable rate. Call Custom Lending Group at (707) 252-2700 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. Generally, the interest on ARMs are based on a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most programs have a "cap" that protects you from sudden monthly payment increases. 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 directly, caps the amount the payment can go up in a given period. Plus, the great majority of adjustable programs have a "lifetime cap" — this means that your interest rate can never go over the cap amount.

ARMs usually start out at a very low rate that usually increases as the loan ages. 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 kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate loans most benefit people who plan to move before the initial lock expires.

You might choose an ARM to take advantage of a very low initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners can get stuck with increasing rates if they cannot sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (707) 252-2700. It's our job to answer these questions and many others, so we're happy to help!

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