Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment remains the same for the life of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but generally, payment amounts on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount applied to your principal amount goes up slowly each month.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Custom Lending Group at (707) 252-2700 to discuss how we can help.

There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes 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.

The majority of ARMs feature this cap, so they can't increase above a specified amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that guarantees that your payment can't increase beyond a fixed amount in a given year. In addition, the great majority of ARM programs have a "lifetime cap" — this cap means that your interest rate can never go over the cap amount.

ARMs usually start out at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for people who anticipate moving within three or five years. These types of ARMs are best for people who plan to move before the initial lock expires.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than the introductory low-rate period. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance.

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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