Differences between adjustable and fixed loans

	Searching for a loan? We'll be glad to answer your questions about your mortgage needs! Call us at (916) 473-1317. Want to get started? Apply Online Now.

A fixed-rate loan features the same payment amount for the entire duration of the loan. The property taxes and homeowners insurance which are almost always part of the payment will increase over time, but for the most part, payments on these types of loans change little over the life of the loan.

Early in a fixed-rate loan, most of your monthly payment pays interest, and a much smaller percentage toward principal. This proportion gradually reverses as the loan ages.

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer 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 Alliance Mortgage and Marketing at (916) 473-1317 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. Generally, the interest for ARMs are determined by a federal index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages feature this cap, which means they won't go up above a specific 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 increase in a given period. The majority of ARMs also cap your interest rate over the duration of the loan.

ARMs most often feature their lowest rates toward the start of the loan. They usually provide that interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed 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 often best for people who expect to move within 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.

Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to remain in the home for any longer than the initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates if they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (916) 473-1317. We answer questions about different types of loans every day.