Differences between adjustable and fixed rate loans

With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will increase over time, but for the most part, payment amounts on fixed rate loans vary little.

Your first few years of payments on a fixed-rate loan go mostly toward interest. As you pay on the loan, more of your payment is applied to principal.

Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when 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 more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Ocean Mortgage at 408-823-2321 for details.

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

The majority of ARMs are capped, so they won't go up over a certain amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can increase in one period. Plus, the great majority of ARMs feature a "lifetime cap" — this means that the rate will never exceed the cap amount.

ARMs most often feature their lowest rates toward the beginning of the loan. They guarantee the lower interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for people who expect to move in three or five years. These types of ARMs benefit borrowers who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and count on moving, refinancing or absorbing the higher rate after the initial rate goes up. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance their loan.