Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your mortgage. The portion of the payment that goes for your principal (the actual loan amount) goes up, but the amount you pay in interest will decrease in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments for your fixed-rate loan will increase very little.

When you first take out a fixed-rate loan, most of your payment goes toward interest. As you pay , 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 choose fixed-rate loans when interest rates are low and they want to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a good rate. Call Lighthouse Mortgage Company at (916) 434-8915 for details.

There are many different kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are based on a federal 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.

Most programs feature a cap that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in one period. In addition, the great majority of ARMs feature a "lifetime cap" — this cap means that the interest rate can't exceed the cap amount.

ARMs most often have their lowest, most attractive rates at the start of the loan. They usually provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. Loans like this are often best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners could be stuck with increasing rates 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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