Differences between fixed and adjustable loans

With a fixed-rate loan, your payment stays the same for the entire duration of your mortgage. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payments on fixed rate loans don't increase much.

At the beginning of a a fixed-rate loan, the majority your payment is applied to interest. The amount applied to principal increases up slowly every month.

You might choose a fixed-rate loan to lock in a low rate. People select fixed-rate loans when interest rates are low and they wish 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 have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Home Ownership Financial , Inc at (408) 292-5000 to discuss how we can help.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.

Most ARM programs feature a cap that protects you from sudden increases in monthly payments. There may be a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the index the rate is based on increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in one period. Plus, the great majority of ARMs feature a "lifetime cap" — the interest rate can't go over the cap amount.

ARMs most often feature their lowest rates toward the start of the loan. They provide that interest rate for an initial period that varies greatly. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial 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 they adjust. Loans like this are usually best for people who expect to move within three or five years. These types of adjustable rate loans most benefit people who plan to move before the initial lock expires.

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