Adjustable versus fixed loans

With a fixed-rate loan, your payment stays the same for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will go up over time, but for the most part, payments on these types of loans don't increase much.

When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. 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 select these types of loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Lighthouse Mortgage Company at (916) 434-8915 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted twice a year, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, so they won't increase above a certain amount in a given period of time. Some ARMs won't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount the payment can increase in a given period. The majority of ARMs also cap your rate over the life of the loan.

ARMs most often have their lowest, most attractive rates toward the start of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. Loans like this are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to get a very low introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot 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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