Fixed versus adjustable rate loans

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A fixed-rate loan features a fixed payment over the life of your loan. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, 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, the majority the payment is applied to interest. The amount applied to principal goes up gradually each month.

You might choose a fixed-rate loan in order to lock in a low rate. Borrowers select these types of loans because interest rates are low and they want to lock in this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Sierra View Financial Corp at 916-989-6222 for details.

Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs are normally adjusted every six months, based on various indexes.

Most Adjustable Rate Mortgages feature this cap, so they can't increase above a specified amount in a given period of time. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in a given period. Plus, almost all ARM programs feature a "lifetime cap" — this means that the interest rate can't go over the capped amount.

ARMs usually start at a very low rate that usually increases over time. You've probably read about 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 a number of years (3 or 5), then they adjust after the initial period. Loans like this are often best for people who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who will sell their house or refinance before the loan adjusts.

Most people who choose ARMs do so because they want to get lower introductory rates and do not plan on staying in the house longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up when they can't sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at 916-989-6222. It's our job to answer these questions and many others, so we're happy to help!