Fixed versus adjustable loans

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

When you first take out a fixed-rate mortgage loan, the majority your payment goes toward interest. The amount applied to your principal amount goes up slowly every month.

Borrowers might choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans because interest rates are low and they wish to lock in this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call Pacific Capital Mortgage Corp at 714-939-3863 to discuss your situation with one of our professionals.

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

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

ARMs most often have the lowest rates at the start of the loan. They usually provide that interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of ARMs are best for borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to get a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the initial rate goes up. ARMs are risky when property values decrease and borrowers can't sell or refinance their loan.

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