Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments on a fixed-rate loan will be very stable.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a much smaller percentage toward principal. As you pay on the loan, more of your payment is applied to principal.

You can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Baywide Funding Corporation at 650 428 0234 to learn more.

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 ARM programs feature 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 a couple percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in a given period. Plus, almost all ARM programs have a "lifetime cap" — the rate can't exceed the capped amount.

ARMs usually start at a very low rate that may increase as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans benefit people who plan to move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values go down and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 650 428 0234. We answer questions about different types of loans every day.