Adjustable versus fixed loans

A fixed-rate loan features the same payment amount over the life of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan go mostly 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 rate. Borrowers choose these types of loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at a favorable rate. Call Wendy @ 760.730.3722 or Penny @ 619.435.5050 for details.

There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

The majority of Adjustable Rate Mortgages are capped, which means they can't increase over a certain amount in a given period. Some ARMs won't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment will not go above a certain amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan.

ARMs usually start 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 fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who will move before the initial lock expires.

You might choose an ARM to take advantage of a very low introductory 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 can get stuck with increasing rates if they cannot sell their home or refinance at the lower property value.

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