Differences between fixed and adjustable loans

With a fixed-rate loan, your monthly payment doesn't change for the life of your mortgage. The amount that goes to principal (the loan amount) goes up, however, your interest payment will decrease in the same amount. The property tax and homeowners insurance will go up 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 mostly to pay interest. The amount applied to principal increases up gradually each month.

You might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call Custom Lending Group at (707) 252-2700 to learn more.

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

Most Adjustable Rate Mortgages feature this cap, so they can't go up over a specified amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which ensures your payment will not go above a certain amount in a given year. Additionally, the great majority of adjustable programs feature a "lifetime cap" — this cap means that the interest rate can't go over the cap percentage.

ARMs most often have the lowest, most attractive rates at the beginning of the loan. They usually provide the lower rate from a month to ten years. You may have heard 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 number of years (3 or 5), then adjust. These loans are often best for borrowers who expect to move in three or five years. These types of ARMs are best for borrowers who will move before the initial lock expires.

You might choose an ARM to take advantage of a lower introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky if property values go down and borrowers can't sell or refinance their loan.

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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