Fixed versus adjustable loans

With a fixed-rate loan, your payment never changes for the life of your mortgage. The amount that goes to principal (the actual loan amount) increases, however, the amount you pay in interest will decrease in the same amount. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on fixed rate loans vary little.

When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. That reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a good rate. Call Baywide Funding Corporation at 650 428 0234 for details.

There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

Most Adjustable Rate Mortgages are capped, which means they can't increase over a certain amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the monthly payment can increase in a given period. Most ARMs also cap your interest rate over the life of the loan.

ARMs most often feature the lowest rates toward the start. They usually provide the lower interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to take advantage of a very low introductory rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates when they can't sell their home or refinance at the lower property value.

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