Fixed versus adjustable loans

With a fixed-rate loan, your monthly payment stays the same for the life of your loan. The portion that goes to your principal (the actual loan amount) will go up, but your interest payment will decrease accordingly. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. That gradually reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Strategic Home Loans, Inc. at (805) 496-7500 to learn more.

There are many types of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most ARM programs have a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment won't go above a certain amount over the course of a given year. Most ARMs also cap your rate over the duration of the loan.

ARMs usually start out at a very low rate that may increase over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are usually best for people who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who will sell their house or refinance before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan to remain in the house for any longer than this introductory low-rate period. ARMs can be risky when property values decrease and borrowers can't sell or refinance their loan.

Have questions about mortgage loans? Call us at (805) 496-7500. It's our job to answer these questions and many others, so we're happy to help!

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