Fixed versus adjustable loans

A fixed-rate loan features the same payment for the entire duration of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. But generally payments on your fixed-rate mortgage will be very stable.

Your first few years of payments on a fixed-rate loan go mostly toward interest. The amount applied to your principal amount increases up slowly each month.

You 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 the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater monthly payment stability. 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.

Adjustable Rate Mortgages — ARMs, as we called them above — come in even more varieties. ARMs usually adjust twice a year, based on various indexes.

Most programs feature a cap that protects borrowers from sudden increases in monthly payments. Your ARM may feature a cap on interest rate variances over the course of a year. For example: no more than two percent per year, even if the underlying index increases by more than two percent. Sometimes an ARM has a "payment cap" that ensures that your payment will not go above a certain amount over the course of a given year. Almost all ARMs also cap your rate over the life of the loan period.

ARMs most often feature their lowest, most attractive rates at the beginning of the loan. They usually provide the lower rate for an initial period that varies greatly. You've likely read about 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for a certain number of years (3 or 5), then they adjust after the initial period. Loans like this are usually best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs benefit people who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a lower initial interest rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky in a down market because homeowners could be stuck with increasing rates if they can't 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.