Differences between adjustable and fixed rate loans

A fixed-rate loan features the same payment amount for the entire duration of your mortgage. The property tax and homeowners insurance will increase over time, but for the most part, payments on these types of 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 goes to 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. People select these types of loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can 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. ARMs are generally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages feature this cap, which means they won't go up above a specific amount in a given period of time. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment won't go above a fixed amount in a given year. The majority of ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature their lowest rates at the beginning of the loan. They provide that rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of ARMs are best for people who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan to stay in the house longer than the initial low-rate period. ARMs are 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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