Differences between adjustable and fixed loans

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

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller part goes to principal. This proportion gradually reverses itself as the loan ages.

You might choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Lighthouse Mortgage Company at (916) 434-8915 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. ARMs are generally adjusted every six months, based on various indexes.

Most programs have a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can increase in a given period. The majority of ARMs also cap your interest rate over the life of the loan period.

ARMs most often have their lowest, most attractive rates at the start of the loan. They usually guarantee that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are best for people who expect to move in three or five years. These types of ARMs most benefit people who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower initial rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell or refinance with a 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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