Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment amount over the life of the mortgage. Your property taxes increase, or rarely, decrease, and so might the homeowner's insurance in your monthly payment. But generally payment amounts on a fixed-rate loan will increase very little.

Your first few years of payments on a fixed-rate loan are applied mostly toward interest. The amount applied to principal goes up slowly every month.

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People choose fixed-rate loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Savers Home Loans at (800) 974-0509 for details.

Adjustable Rate Mortgages — ARMs, as we called them above — come in many varieties. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month 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 feature this cap, so they won't increase above a specific amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in a given period. In addition, almost all ARM programs have a "lifetime cap" — this means that your rate can never exceed the capped percentage.

ARMs most often feature the lowest, most attractive rates at the start. They guarantee the lower 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 after the initial period. Loans like this are often best for borrowers who expect to move within three or five years. These types of adjustable rate programs most benefit people who plan to move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory interest rate and plan on moving, refinancing or simply absorbing the higher rate after the introductory rate expires. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they cannot sell or refinance with a 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!