Differences between fixed and adjustable rate loans

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A fixed-rate loan features a fixed payment amount over the life of your mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up 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, a large percentage of your payment goes toward interest, and a significantly smaller percentage toward principal. As you pay , more of your payment is applied to principal.

You can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call RPM Mortgage - Paul Schectman Senior Mortgage Advisor at 415-381-7006 to discuss your situation with one of our professionals.

There are many types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

Most programs have a "cap" that protects you from sudden monthly payment increases. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment will not increase beyond a certain amount over the course of a given year. In addition, the great majority of ARMs have a "lifetime cap" — your interest rate will never go over the capped amount.

ARMs most often feature their lowest rates at the start of the loan. They guarantee that interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. These loans are often best for borrowers who anticipate moving within three or five years. These types of ARMs are best for people who plan to move before the initial lock expires.

Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan to remain in the home longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell their home or refinance their loan.

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