Differences between adjustable and fixed loans
A fixed-rate loan features the same payment amount over the life of the mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. But generally payments on your fixed-rate mortgage will increase very little.
Early in a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller percentage toward principal. The amount paid toward principal goes up slowly every month.
Borrowers might choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with 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 the best rate currently available. Call Savers Home Loans at (800) 974-0509 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, come in even more varieties. ARMs are normally adjusted every six months, based on various indexes.
Most ARM programs feature a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment will not increase beyond a fixed amount over the course of a given year. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often have their lowest rates at the start. They usually guarantee the lower interest rate for an initial period that varies greatly. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed 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 often best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the initial lock expires.
You might choose an ARM to get a very low introductory rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky if property values go down and borrowers can't sell 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!