Adjustable versus fixed loans

A fixed-rate loan features the same payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments for your fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan go primarily to pay interest. As you pay on the loan, more of your payment goes toward principal.

Borrowers might 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 wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in 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 kinds of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by a federal index. A few of these 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 Adjustable Rate Mortgages are capped, so they won't go up over a specific amount in a given period of time. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than two percent a year, even if the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment can't go above a certain amount over the course of a given year. The majority of ARMs also cap your interest rate over the life of the loan.

ARMs usually start at a very low rate that may increase as the loan ages. You've likely read about 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 a certain number of years (3 or 5), then they adjust after the initial period. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans benefit borrowers who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to take advantage of a lower initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners could be stuck with rates that go up when they can't sell their home or refinance with a lower property value.

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