Differences between adjustable and fixed rate loans
With a fixed-rate loan, your monthly payment remains the same for the life of your mortgage. The amount of the payment allocated to your principal (the actual loan amount) will go up, however, the amount you pay in interest will go down accordingly. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on these types of loans vary little.
When you first take out a fixed-rate mortgage loan, most of the payment goes toward interest. The amount applied to your principal amount increases up gradually each month.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers select these types of loans when interest rates are low and they want to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we'd love to assist you in locking a fixed-rate at the best rate currently available. Call Savers Home Loans at (800) 974-0509 for details.
There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they won't increase above a specific amount in a given period. Some ARMs can'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 monthly payment can go up in a given period. Additionally, the great majority of ARMs have a "lifetime cap" — this means that your rate can never go over the capped amount.
ARMs most often have the lowest rates toward the beginning. They provide that interest rate for an initial period that varies greatly. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". For 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 after the initial period. These loans are often best for people who expect to move in three or five years. These types of adjustable rate loans are best for people who plan to move before the loan adjusts.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the home for any longer than the initial low-rate period. ARMs are risky when property values go down 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!