Differences between adjustable and fixed loans

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With a fixed-rate loan, your monthly payment never changes for the life of the mortgage. The portion of the payment that goes to your principal (the amount you borrowed) goes up, but the amount you pay in interest will decrease in the same amount. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payment amounts on a fixed-rate mortgage will be very stable.

At the beginning of a a fixed-rate loan, most of your payment is applied to interest. As you pay on the loan, more of your payment goes toward principal.

You can choose a fixed-rate loan to lock in a low rate. People select these types of loans when interest rates are low and they wish to lock in this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a good rate. Call Western Reliance Funding Group, Inc. at 800.465.1404.1002 to learn more.

Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. Generally, the interest rates for ARMs are determined by an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 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 increases in monthly payments. 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 per year, even if the index the rate is based on increases by more than two percent. Your loan may have a "payment cap" that instead of capping the interest directly, caps the amount that your monthly payment can go up in a given period. Additionally, the great majority of ARM programs feature a "lifetime cap" — your interest rate can't go over the cap percentage.

ARMs usually start out at a very low rate that usually increases as the loan ages. You've probably read about 5/1 or 3/1 ARMs. In these loans, the introductory rate is fixed for three or five years. After this period it adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust. Loans like this are usually best for people who anticipate moving in three or five years. These types of adjustable rate loans benefit borrowers who will move before the loan adjusts.

Most borrowers who choose ARMs choose them when they want to take advantage of lower introductory rates and don't plan to stay in the house for any longer than this initial low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with rates that go up when they cannot sell their home or refinance at the lower property value.

Have questions about mortgage loans? Call us at 800.465.1404.1002. It's our job to answer these questions and many others, so we're happy to help!