Fixed versus adjustable rate loans

With a fixed-rate loan, your payment never changes for the life of your loan. The portion of the payment allocated to your principal (the loan amount) goes up, however, your interest payment will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate loan will be very stable.

Early in a fixed-rate loan, a large percentage of your payment pays interest, and a significantly smaller percentage toward principal. That gradually reverses itself as the loan ages.

You might 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 at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at the best rate currently available. Call SkyWest Mortgage at (916) 399-5500 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, interest for ARMs are based on an outside index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, 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 won't go up above a certain amount in a given period. 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 monthly payment can go up in one period. The majority of ARMs also cap your rate over the life of the loan period.

ARMs usually start at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial 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. These loans are often best for people who anticipate moving in three or five years. These types of adjustable rate programs benefit borrowers who plan to sell their house or refinance before the initial lock expires.

You might choose an ARM to get a lower introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs are risky if property values go down and borrowers are unable to sell their home or refinance their loan.

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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