Differences between fixed and adjustable loans

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A fixed-rate loan features the same payment over the life of your loan. The property tax and homeowners insurance will go up over time, but in general, payment amounts on these types of loans change little over the life of the loan.

When you first take out a fixed-rate mortgage loan, most of the payment is applied to interest. As you pay , more of your payment goes toward principal.

You can choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans because interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call First Funding at (408) 540-0200 to discuss your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs feature a cap that protects you from sudden monthly payment increases. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment will not increase beyond a fixed amount in a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — the interest rate will never exceed the capped amount.

ARMs usually start at a very low rate that may increase as the loan ages. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory 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 usually best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit people who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to get a very low introductory rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs are risky if property values go down and borrowers can't sell or refinance their loan.

Have questions about mortgage loans? Call us at (408) 540-0200. We answer questions about different types of loans every day.

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