Adjustable versus fixed loans

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

Early in a fixed-rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part goes to principal. The amount applied to your principal amount increases up slowly every month.

Borrowers can choose a fixed-rate loan in order to lock in a low interest rate. People select fixed-rate loans when interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can assist you in locking a fixed-rate at a good rate. Call Savers Home Loans at (800) 974-0509 to learn more.

There are many different types of Adjustable Rate Mortgages. Generally, the interest for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of ARMs feature this cap, so they won't go up above a specified 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 though the underlying index increases by more than two percent. Sometimes an ARM features a "payment cap" that guarantees your payment can't go above a certain amount in a given year. Additionally, almost all ARMs have a "lifetime cap" — your interest rate can't go over the cap percentage.

ARMs most often have their lowest, most attractive rates at the start. They usually provide that interest rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For 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 adjust. These loans are best for borrowers who expect to move within three or five years. These types of adjustable rate programs benefit people who will sell their house or refinance before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates if they cannot sell their home or refinance with a 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!