Differences between adjustable and fixed loans
With a fixed-rate loan, your payment remains the same for the life of your mortgage. The amount allocated for principal (the actual loan amount) goes up, but the amount you pay in interest will decrease in the same amount. The property taxes and homeowners insurance will go up over time, but for the most part, payment amounts on fixed rate loans change little over the life of the loan.
Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount paid toward your principal amount goes up slowly every month.
You can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans because interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a good rate. Call Savers Home Loans at (800) 974-0509 to discuss how we can help.
There are many different types of Adjustable Rate Mortgages. ARMs are generally adjusted twice a year, based on various indexes.
The majority of Adjustable Rate Mortgages are capped, so they won't go up above a certain amount in a given period of time. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" that ensures that your payment won't increase beyond a certain amount in a given year. Most ARMs also cap your interest rate over the life of the loan period.
ARMs most often have the lowest, most attractive rates at the start. They guarantee the lower interest rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a number of years (3 or 5), then they adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the loan adjusts.
Most people who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to remain in the home for any longer than this introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up when they can't 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!