Adjustable versus fixed rate loans
With a fixed-rate loan, your payment stays the same for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts on your fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate mortgage loan, most of your payment goes toward interest. The amount applied to your principal amount goes up slowly each month.
Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call Savers Home Loans at (800) 974-0509 to discuss your situation with one of our professionals.
There are many types of Adjustable Rate Mortgages. Generally, interest for ARMs are determined by an outside index. A few of these are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs feature a "cap" that protects borrowers from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent a year, even though the underlying index goes up by more than two percent. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can increase in one period. Plus, almost all ARMs feature a "lifetime cap" — your rate can't ever go over the cap percentage.
ARMs most often feature their lowest, most attractive rates at the start of the loan. They provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust. These loans are usually best for people who expect to move in three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan to remain in the home for any longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at (800) 974-0509. We answer questions about different types of loans every day.