Differences between fixed and adjustable rate loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payments for a fixed-rate mortgage will increase very little.

When you first take out a fixed-rate loan, the majority the payment is applied to 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 interest rate. Borrowers choose 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'd love to help you lock in a fixed-rate at a favorable rate. Call Baywide Funding Corporation at 650 428 0234 for details.

There are many types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on a federal index. Some examples of outside indexes are: the 6-month CD rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages feature this cap, which means they won't go up above a certain amount in a given period. There may be 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 if the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" that guarantees your payment will not go above a certain amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan.

ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate loans most benefit people who plan to move before the loan adjusts.

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

Have questions about mortgage loans? Call us at 650 428 0234. It's our job to answer these questions and many others, so we're happy to help!