Differences between adjustable and fixed loans

With a fixed-rate loan, your monthly payment never changes for the life of your mortgage. The amount of the payment that goes to principal (the amount you borrowed) will increase, but the amount you pay in interest will go down in the same amount. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but in general, payments on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied mostly to pay interest. This proportion reverses as the loan ages.

You can 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 want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), 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.

There are many different types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the one-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, which means they can't increase above a certain amount in a given period. Some ARMs can't increase more than 2% per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your payment can increase in a given period. Additionally, the great majority of adjustable programs feature a "lifetime cap" — your interest rate won't go over the cap percentage.

ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are best for people who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will move before the initial lock expires.

Most borrowers who choose ARMs do so because they want to get lower introductory rates and do not plan to remain in the home for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they cannot sell or refinance at the lower property value.

Have questions about mortgage loans? Call us at (800) 974-0509. We answer questions about different types of loans every day.