Differences between adjustable and fixed rate loans

With a fixed-rate loan, your payment never changes for the life of the mortgage. The portion of the payment that goes to your principal (the actual loan amount) will go up, but your interest payment will go down accordingly. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans change little over the life of the loan.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part toward principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to 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 kinds of Adjustable Rate Mortgages. Generally, interest rates for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs are capped, which means they won't go up over a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in one period. Most ARMs also cap your interest rate over the life of the loan period.

ARMs most often have the lowest rates at the beginning of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. 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. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for borrowers who expect to move within three or five years. These types of ARMs benefit borrowers who plan to move before the loan adjusts.

You might choose an ARM to take advantage of a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers cannot sell their home 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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