Differences between adjustable and fixed rate loans

A fixed-rate loan features a fixed payment amount for the entire duration of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but for the most part, payment amounts on these types of loans change little over the life of the loan.

Early in a fixed-rate loan, a large percentage of your payment goes toward interest, and a significantly smaller percentage goes to principal. This proportion gradually reverses as the loan ages.

Borrowers might choose a fixed-rate loan to lock in a low rate. Borrowers select fixed-rate loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer 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 your situation with one of our professionals.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, interest rates on ARMs are based on a federal index. Some examples of outside indexes 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 programs have a cap that protects you from sudden monthly payment increases. Your ARM may feature a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a year, even though the index the rate is based on increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures your payment won't go above a certain amount in a given year. Almost all ARMs also cap your interest rate over the life of the loan period.

ARMs most often feature the lowest rates at the start of the loan. They guarantee that interest rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These kinds of loans are fixed for a number of years (3 or 5), then they adjust. Loans like this are best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit borrowers who will move before the initial lock expires.

Most borrowers who choose ARMs choose them when they want to get lower introductory rates and do not plan on remaining in the house for any longer than the initial low-rate period. ARMs can be risky in a down market because homeowners could be stuck with rates that go up if they cannot sell or refinance at the lower property value.

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