Fixed versus adjustable loans

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With a fixed-rate loan, your monthly payment doesn't change 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 so might the homeowner's insurance in your monthly payment. But generally monthly payments for a fixed-rate mortgage will increase very little.

At the beginning of a a fixed-rate mortgage loan, most of the payment is applied to interest. The amount applied to principal increases up gradually every month.

You might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call Bridge View Funding at 415.931.2883 to discuss how we can help.

There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted every six months, based on various indexes.

Most 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" which guarantees your payment will not increase beyond a fixed amount in a given year. Additionally, the great majority of ARM programs feature a "lifetime cap" — this means that your interest rate can't exceed the capped amount.

ARMs most often feature their lowest, most attractive rates toward the start of the loan. They usually guarantee that rate from a month to ten years. You've likely heard of 5/1 or 3/1 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 they adjust. Loans like this are best for people who expect to move in three or five years. These types of ARMs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.

Most people who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than this initial low-rate period. ARMs are risky when property values go down and borrowers are unable to sell or refinance their loan.

Have questions about mortgage loans? Call us at 415.931.2883. We answer questions about different types of loans every day.