Fixed versus adjustable loans

A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. The property tax and homeowners insurance which are almost always part of the payment will go up over time, but in general, payment amounts on these types of loans change little over the life of the loan.

At the beginning of a a fixed-rate loan, most of the payment goes toward interest. As you pay on the loan, more of your payment is applied to principal.

You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they want to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at a favorable rate. Call Savers Home Loans at (800) 974-0509 for details.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. Generally, the interest rates on ARMs are based on a federal index. A few of these are: the 6-month 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 programs have a cap that protects you from sudden increases in monthly payments. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment can't go above a certain amount over the course of a given year. In addition, the great majority of adjustable programs have a "lifetime cap" — the interest rate won't go over the cap amount.

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". In these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. These loans are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit people who will sell their house or refinance before the initial lock expires.

You might choose an ARM to get a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky when property values go down and borrowers can't sell their home 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!