Differences between fixed and adjustable loans
A fixed-rate loan features the same payment for the entire duration of your loan. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on these types of loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan are applied mostly toward interest. As you pay , more of your payment goes toward principal.
Borrowers can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in at 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 currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Savers Home Loans at (800) 974-0509 to discuss your situation with one of our professionals.
Adjustable Rate Mortgages — ARMs, come in even more varieties. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
The majority of ARMs feature this cap, which means they won't increase above a certain amount in a given period of time. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment can't go above a fixed amount in a given year. In addition, the great majority of adjustable programs feature a "lifetime cap" — this cap means that the rate won't exceed the cap amount.
ARMs most often have their lowest, most attractive rates toward the start. They usually guarantee that interest rate from a month to ten years. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust. These loans are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit borrowers who will move before the initial lock expires.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan on remaining in the home longer than the initial low-rate period. ARMs can be risky if property values go down and borrowers can't sell their home or refinance.
Have questions about mortgage loans? Call us at (800) 974-0509. We answer questions about different types of loans every day.