Fixed versus adjustable rate loans

A fixed-rate loan features the same payment for the entire duration of your loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.

When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. That gradually reverses as the loan ages.

You might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Cal Coast Financial Corp at (510) 683-9850 to discuss how we can help.

There are many kinds of Adjustable Rate Mortgages. Generally, interest rates for ARMs are based on a federal index. Some examples of outside indexes 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.

Most ARMs are capped, which means they won't go up over a certain amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. 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" which ensures that your payment won't increase beyond a certain amount in a given year. Plus, the great majority of ARM programs have a "lifetime cap" — your interest rate can't exceed the capped amount.

ARMs usually start at a very low rate that may increase over time. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then they adjust. These loans are often best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on staying in the house longer than the initial low-rate period. ARMs are risky when property values go down and borrowers cannot sell their home or refinance.

Have questions about mortgage loans? Call us at (510) 683-9850. It's our job to answer these questions and many others, so we're happy to help!

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