Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment over the life of your mortgage. 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.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. The amount paid toward your principal amount goes up slowly every month.

You can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Lighthouse Mortgage Company at (916) 434-8915 to learn more.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs are capped, so they won't go up over a specific 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 monthly payment can go up in one period. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs most often have their lowest, most attractive rates toward the start. They usually guarantee that interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate programs most benefit borrowers who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the home longer than the initial low-rate period. ARMs can be risky if property values go down and borrowers are unable to sell their home or refinance their loan.

Have questions about mortgage loans? Call us at (916) 434-8915. It's our job to answer these questions and many others, so we're happy to help!

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