Differences between adjustable and fixed loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. The property taxes and homeowners insurance will increase over time, but for the most part, payments on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan are applied primarily to pay interest. The amount paid toward principal increases up slowly each month.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more 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.

There are many different types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs are capped, so they won't increase above a certain amount in a given period. Some ARMs can'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 the monthly payment can go up in a given period. The majority of ARMs also cap your rate over the life of the loan.

ARMs usually start at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be 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. We answer questions about different types of loans every day.

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