Differences between fixed and adjustable loans

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A fixed-rate loan features a fixed payment amount over the life of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for your fixed-rate loan will be very stable.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller part goes to principal. As you pay on the loan, more of your payment is applied to principal.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call Bay Area Capital Funding . at (650) 631-1800 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, interest for ARMs are based on a federal index. Some examples of outside indexes 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 ARMs feature this cap, which means they can't increase over a certain amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that your monthly payment can increase in one period. In addition, almost all ARM programs feature a "lifetime cap" — this cap means that the rate can't ever go over the cap percentage.

ARMs usually start at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In 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 adjust after the initial period. Loans like this are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs most 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 initial interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values decrease and borrowers are unable to sell or refinance.

Have questions about mortgage loans? Call us at (650) 631-1800. It's our job to answer these questions and many others, so we're happy to help!

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