Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment amount for the entire duration of the loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally payment amounts on a fixed-rate mortgage will increase very little.

When you first take out a fixed-rate loan, the majority the payment goes toward interest. The amount paid toward principal goes up slowly every month.

Borrowers might choose a fixed-rate loan to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they wish to lock in the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in 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 even more varieties. Generally, interest on ARMs are determined by a federal index. Some examples of outside indexes 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.

The majority of Adjustable Rate Mortgages feature this cap, so they won't increase above a specified amount in a given period. Some ARMs won't increase more than two percent 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 the payment can go up in a given period. Almost all ARMs also cap your rate over the duration of the loan period.

ARMs usually start at a very low rate that usually increases over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then adjust. These loans are often best for people who expect to move within three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so because they want to take advantage of lower introductory rates and do not plan on staying in the house longer than the introductory low-rate period. ARMs are risky if property values decrease and borrowers are unable to sell or refinance.

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