Fixed versus adjustable loans
A fixed-rate loan features the same payment over the life of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments on your fixed-rate mortgage will increase very little.
When you first take out a fixed-rate mortgage loan, the majority the payment is applied to interest. That reverses itself as the loan ages.
You can choose a fixed-rate loan to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. 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 discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by a federal index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs are capped, which means they can't go up over a specific amount in a given period of time. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount your payment can go up in a given period. Almost all ARMs also cap your interest rate over the duration of the loan.
ARMs most often have the lowest, most attractive rates at the beginning of the loan. They usually guarantee the lower interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of ARMs benefit borrowers who plan to move before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to take advantage of lower introductory rates and do not plan to stay in the house longer than this initial low-rate period. ARMs can be risky when property values go down and borrowers cannot sell their home or refinance.
Have questions about mortgage loans? Call us at (800) 974-0509. It's our job to answer these questions and many others, so we're happy to help!