Fixed versus adjustable loans

A fixed-rate loan features the same payment amount over the life of the mortgage. The property taxes and homeowners insurance will increase over time, but generally, payments on fixed rate loans vary little.

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

Borrowers can choose a fixed-rate loan in order to lock in a low rate. People select these types of loans because interest rates are low and they wish to lock in the low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can offer more 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 a good rate. Call Savers Home Loans at (800) 974-0509 for details.

There are many different types of Adjustable Rate Mortgages. ARMs are normally adjusted twice a year, based on various indexes.

Most ARM programs have a cap that protects you from sudden increases in monthly payments. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the index the rate is based on goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount your monthly payment can increase in one period. Additionally, almost all ARMs feature a "lifetime cap" — the interest rate will never go over the capped amount.

ARMs usually start at a very low rate that usually increases as the loan ages. You may hear people talking 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 adjust. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans are best for borrowers who will sell their house or refinance before the initial lock expires.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan to remain in the house longer than the introductory low-rate period. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance their loan.

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!