Differences between adjustable and fixed rate loans

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With a fixed-rate loan, your monthly payment remains the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans don't increase much.

When you first take out a fixed-rate mortgage loan, the majority the payment is applied to 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 select fixed-rate loans when interest rates are low and they want to lock in at the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at the best rate currently available. Call Fidelity Bancorp at (909) 476-3575 to learn more.

There are many types of Adjustable Rate Mortgages. ARMs usually adjust twice a year, based on various indexes.

Most programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can go up in a given period. In addition, almost all adjustable programs feature a "lifetime cap" — this means that your rate won't go over the capped amount.

ARMs most often have their lowest rates toward the beginning of the loan. They usually provide that 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 fixed 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 best for borrowers who anticipate moving in three or five years. These types of ARMs are best for people who will move before the initial lock expires.

You might choose an ARM to get a lower introductory interest rate and plan 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 can get stuck with increasing rates when they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at (909) 476-3575. It's our job to answer these questions and many others, so we're happy to help!

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