Differences between fixed and adjustable rate loans
With a fixed-rate loan, your payment doesn't change for the entire duration of the loan. The longer you pay, the more of your payment goes toward principal. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payment amounts for your fixed-rate loan will be very stable.
During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a significantly smaller part toward principal. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, 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 for details.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARMs are capped, so they can't go up above a specific amount in a given period. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than two percent a year, even though the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment won't increase beyond a certain amount over the course of a given year. Additionally, the great majority of ARM programs have a "lifetime cap" — this means that your rate can never go over the cap percentage.
ARMs usually start at a very low rate that may increase as the loan ages. You may have heard 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 loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who will sell their house or refinance before the initial lock expires.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to remain in the house for any longer than this introductory low-rate period. ARMs are risky if property values decrease and borrowers cannot 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!