Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment remains the same for the life of your loan. The portion of the payment allocated to principal (the actual loan amount) will increase, but the amount you pay in interest will decrease in the same amount. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for your fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller percentage toward principal. The amount paid toward principal increases up gradually every month.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People select these types of loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call Savers Home Loans at (800) 974-0509 to learn more.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs are generally adjusted every six months, based on various indexes.
Most ARMs feature this cap, so they won't go up over a specific amount in a given period of time. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that the payment can go up in a given period. Additionally, almost all adjustable programs feature a "lifetime cap" — the interest rate can't exceed the capped amount.
ARMs usually start out at a very low rate that may increase over time. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory 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. These loans are usually best for people who expect to move in three or five years. These types of ARMs benefit people who will move before the initial lock expires.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on staying in the house longer than this initial low-rate period. ARMs are risky if property values go down and borrowers are unable to sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (800) 974-0509. We answer questions about different types of loans every day.