Adjustable versus fixed rate loans
With a fixed-rate loan, your payment stays the same for the life of the loan. The longer you pay, the more of your payment goes toward principal. The property tax and homeowners insurance will increase over time, but generally, payments on fixed rate loans change little over the life of the loan.
At the beginning of a a fixed-rate mortgage loan, the majority the payment is applied to interest. That reverses as the loan ages.
Borrowers might choose a fixed-rate loan to lock in a low rate. People choose fixed-rate loans because interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can help you lock in a fixed-rate at a favorable rate. Call Savers Home Loans at (800) 974-0509 to discuss how we can help.
There are many different kinds of Adjustable Rate Mortgages. Generally, interest on ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month CD rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most ARM programs have a cap that protects borrowers from sudden monthly payment increases. There may be a cap on interest rate increases over the course of a year. For example: no more than two percent per year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" which guarantees that your payment won't increase beyond a fixed amount in a given year. The majority of ARMs also cap your rate over the duration of the loan.
ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed 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. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans benefit borrowers who plan to sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them when they want to get lower introductory rates and do not plan to remain in the home longer than this initial low-rate period. ARMs are risky if property values go down and borrowers cannot sell 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!