Differences between adjustable and fixed loans

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With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate mortgage will be very stable.

During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage toward principal. This proportion gradually reverses itself as the loan ages.

Borrowers might choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans because interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide 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 Diane Giannelli at (760) 415-7982 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest on ARMs are determined by an outside index. A few of these 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.

Most programs have a "cap" that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment won't increase beyond a fixed amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan.

ARMs usually start out at a very low rate that usually increases over time. 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 types of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are best for borrowers who anticipate moving within three or five years. These types of ARMs most benefit people who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower initial 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 if they cannot sell their home or refinance at the lower property value.

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