Differences between fixed and adjustable rate loans

A fixed-rate loan features a fixed payment over the life of the loan. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payments for a fixed-rate mortgage will increase very little.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part goes to principal. That gradually reverses as the loan ages.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to help you lock in a fixed-rate at the best rate currently available. Call Baywide Funding Corporation at 650 428 0234 to learn more.

There are many types of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages feature this cap, so they won't go up above a certain amount in a given period of time. 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 a year, even though the index the rate is based on goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures your payment will not increase beyond a certain amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan.

ARMs usually start at a very low rate that usually increases over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans are best for people who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to remain in the home for any longer than the initial low-rate period. ARMs are risky if property values decrease 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!