Differences between adjustable and fixed rate loans

With a fixed-rate loan, your monthly payment remains the same for the entire duration of your mortgage. The portion allocated for principal (the actual loan amount) will go up, but your interest payment will decrease in the same amount. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans change little over the life of the loan.

Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage goes to principal. The amount applied to principal increases up gradually each month.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in at this low rate. If you have an Adjustable Rate Mortgage (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'll be glad to help you lock in a fixed-rate at a good rate. Call SkyWest Mortgage at (916) 399-5500 for details.

Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, interest rates for ARMs are based on a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (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 feature a "cap" that protects borrowers from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" which guarantees your payment can't increase beyond a certain amount over the course of a given year. Additionally, almost all ARM programs have a "lifetime cap" — the interest rate can't exceed the cap amount.

ARMs usually start at a very low rate that may increase as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are best for borrowers who expect to move in three or five years. These types of adjustable rate programs are best for people who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky when property values go down and borrowers cannot sell their home or refinance.

Have questions about mortgage loans? Call us at (916) 399-5500. We answer questions about different types of loans every day.

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