Fixed versus adjustable loans
With a fixed-rate loan, your payment stays the same for the life of your loan. The longer you pay, the more of your payment goes toward principal. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for a fixed-rate loan will increase very little.
Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller part toward principal. This proportion gradually reverses as the loan ages.
You might choose a fixed-rate loan in order to lock in a low interest rate. People choose these types of loans when interest rates are low and they wish to lock in at this lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at the best rate currently available. Call Savers Home Loans at (800) 974-0509 to learn more.
There are many different kinds of Adjustable Rate Mortgages. Generally, the interest rates on ARMs are based on a federal index. A few of these are: the 6-month CD rate, the 1 year rate on Treasure Securities, 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 go up above a specific amount in a given period. Your ARM may feature a cap on interest rate increases over the course of a year. For example: no more than a couple percent a year, even if the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment can't increase beyond a fixed amount over the course of a given year. In addition, the great majority of ARMs have a "lifetime cap" — the rate won't exceed the cap percentage.
ARMs most often have their lowest rates at the beginning. They usually guarantee that interest rate from a month to ten years. You've likely read about 5/1 or 3/1 ARMs. For these loans, the initial rate is set for three or five years. It then adjusts every year. These loans are fixed for 3 or 5 years, then they adjust after the initial period. Loans like this are best for people who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who plan to move before the loan adjusts.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and don't plan to stay in the home longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they can't sell or refinance at the 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!