Differences between adjustable and fixed loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of the mortgage. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally monthly payments on a fixed-rate mortgage will be very stable.
Your first few years of payments on a fixed-rate loan go primarily to pay interest. That reverses itself as the loan ages.
You can choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they wish to lock in at the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, 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 how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, interest rates on ARMs are determined by an outside index. Some examples of outside indexes 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.
The majority of Adjustable Rate Mortgages feature this cap, which means they can't increase above a certain amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees that your payment can't increase beyond a certain amount in a given year. Plus, almost all ARMs have a "lifetime cap" — the rate can't ever go over the cap amount.
ARMs most often feature their lowest, most attractive rates at the beginning of the loan. They provide that interest rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then they adjust. These loans are often best for people who anticipate moving in three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan on staying in the home for any longer than this introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell or refinance at the lower property value.
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!