Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment doesn't change for the entire duration of your loan. The portion of the payment allocated to principal (the loan amount) will go up, however, your interest payment will decrease accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on these types of loans vary little.

Your first few years of payments on a fixed-rate loan go mostly to pay interest. The amount paid toward your principal amount goes up slowly each month.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they wish 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 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 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, interest rates for ARMs are determined by a federal index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARM programs have a "cap" that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your payment can increase in a given period. Most ARMs also cap your rate over the duration of the loan period.

ARMs most often have their lowest rates at the start. They provide the lower rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are often best for borrowers who expect to move in three or five years. These types of adjustable rate loans are best for borrowers who plan to move before the initial lock expires.

Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on staying in the house for any longer than this introductory low-rate period. ARMs can be risky when property values decrease and borrowers are unable to sell their home or refinance their loan.

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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