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Fixed versus adjustable rate loans

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A fixed-rate loan features a fixed payment for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payment amounts on these types of loans don't increase much.

During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage goes to principal. The amount paid toward principal increases up slowly every month.

You can choose a fixed-rate loan in order to lock in a low rate. Borrowers choose fixed-rate loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a favorable rate. Call All Access California at 559-314-5363 to discuss how we can help.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, which means they can't increase over a specified amount in a given period of time. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount the payment can go up in one period. Most ARMs also cap your interest rate over the life of the loan.

ARMs most often have their lowest rates at the start of the loan. They usually provide the lower rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it 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 people who expect to move in three or five years. These types of ARMs benefit borrowers who plan to sell their house or refinance before the initial lock expires.

Most borrowers 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 this initial low-rate period. ARMs can be risky when property values decrease and borrowers can't sell or refinance.

Have questions about mortgage loans? Call us at 559-314-5363. It's our job to answer these questions and many others, so we're happy to help!