Fixed versus adjustable loans

A fixed-rate loan features a fixed payment over the life of your mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on your fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate mortgage loan, most of the payment goes toward interest. As you pay on the loan, more of your payment goes toward principal.

You might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Custom Lending Group at (707) 252-2700 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are normally adjusted every six months, based on various indexes.

The majority of ARMs feature this cap, so they won't increase over a specific amount in a given period of time. There may be a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the payment can go up in one period. The majority of ARMs also cap your rate over the life of the loan.

ARMs usually start out at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial 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 after the initial period. Loans like this are usually best for people who expect to move within three or five years. These types of ARMs benefit people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell their home or refinance at the lower property value.

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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