Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment over the life of your loan. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans don't increase much.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage toward principal. That reverses itself as the loan ages.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans when interest rates are low and they wish to lock in at this 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 have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Custom Lending Group at (707) 252-2700 for details.

There are many types of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, so they won't increase over a specified amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment can't go above a fixed amount over the course of a given year. Plus, the great majority of ARM programs feature a "lifetime cap" — this cap means that your rate can't go over the capped amount.

ARMs most often have the lowest, most attractive rates at the beginning of the loan. They provide that 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. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs are best for people who will move before the loan adjusts.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on staying in the house longer than this introductory low-rate period. ARMs are risky if property values go down and borrowers can't sell or refinance.

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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