Fixed versus adjustable rate loans

A fixed-rate loan features the same payment over the life of your loan. The property tax and homeowners insurance will increase over time, but generally, payment amounts on these types of loans don't increase much.

When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. The amount paid toward your principal amount goes up gradually every month.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Cal Coast Financial Corp at (510) 683-9850 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest rates on ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 are capped, which means they can't go up over a specific amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. 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. Plus, the great majority of ARMs feature a "lifetime cap" — this means that the interest rate can't ever exceed the capped percentage.

ARMs usually start out at a very low rate that usually increases as the loan ages. 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 3 or 5 years, then adjust after the initial period. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to get a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs are risky when property values go down and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at (510) 683-9850. We answer questions about different types of loans every day.

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