Adjustable versus fixed loans

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

During the early amortization period of a fixed-rate loan, most of your monthly payment pays interest, and a significantly smaller part goes to principal. This proportion gradually reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Lighthouse Mortgage Company at (916) 434-8915 for details.

There are many different kinds of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.

Most Adjustable Rate Mortgages are capped, which means they can't increase above a certain amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment won't go above a fixed amount in a given year. Most ARMs also cap your rate over the life of the loan.

ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They guarantee the lower interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust. These loans are best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the initial lock expires.

You might choose an ARM to take advantage of a very low introductory rate and count 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 rates that go up if they can't sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (916) 434-8915. We answer questions about different types of loans every day.

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