Differences between fixed and adjustable loans

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A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments for your fixed-rate mortgage will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. The amount paid toward your principal amount goes up slowly each month.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they want to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call Allstate Mortgage Company at (707) 521-3434 Ext. 23 to discuss your situation with one of our professionals.

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

Most ARM programs feature a cap that protects borrowers from sudden monthly payment increases. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" that ensures that your payment can't increase beyond a fixed amount in a given year. The majority of ARMs also cap your rate over the life of the loan period.

ARMs most often have the lowest rates toward the beginning of the loan. They provide that rate from a month to ten years. You've probably read about 5/1 or 3/1 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 adjust. These loans are often best for people who anticipate moving within three or five years. These types of adjustable rate programs benefit borrowers who will move before the loan adjusts.

You might choose an Adjustable Rate Mortgage to take advantage of a lower introductory interest rate and count on moving, refinancing or simply absorbing the higher rate after the introductory rate goes up. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell or refinance with a lower property value.

Have questions about mortgage loans? Call us at (707) 521-3434 Ext. 23. We answer questions about different types of loans every day.