Adjustable versus fixed loans

With a fixed-rate loan, your payment remains the same for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts for your fixed-rate loan will increase very little.

When you first take out a fixed-rate loan, most of your payment goes toward interest. The amount applied to principal increases up gradually every month.

You might choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at this lower 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'd love to help you lock in a fixed-rate at a favorable rate. Call SkyWest Mortgage at (916) 399-5500 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs are generally adjusted twice a year, based on various indexes.

Most ARMs feature this cap, so they won't go up above a specified amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment can't increase beyond a fixed amount in a given year. In addition, the great majority of ARM programs have a "lifetime cap" — this cap means that the interest rate won't exceed the cap percentage.

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". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit people who plan to sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and don't plan to stay in the home longer than the initial low-rate period. ARMs are risky if property values go down and borrowers are unable to sell 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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