Fixed versus adjustable rate loans

A fixed-rate loan features the same payment for the entire duration of the mortgage. The property taxes and homeowners insurance will increase over time, but in general, payment amounts on fixed rate loans don't increase much.

Your first few years of payments on a fixed-rate loan are applied primarily toward interest. As you pay , more of your payment is applied to principal.

You might choose a fixed-rate loan in order to lock in a low interest rate. Borrowers select these types of loans because interest rates are low and they wish to lock in at the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call Creative Home Loans at 602-953-1700 to learn more.

There are many different types of Adjustable Rate Mortgages. Generally, interest rates on ARMs are based on an outside index. A few of these are: the 6-month CD rate, the one-year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

Most ARMs feature this cap, so they can't go up above a specific amount in a given period of time. There may be a cap on interest rate increases over the course of a year. For example: no more than a couple percent per year, even though the underlying index goes up by more than two percent. Sometimes an ARM has a "payment cap" which guarantees your payment can't increase beyond a fixed amount over the course of a given year. In addition, the great majority of ARM programs feature a "lifetime cap" — this means that the interest rate can't ever exceed the cap amount.

ARMs usually start at a very low rate that usually increases as the loan ages. You've likely heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then they adjust after the initial period. These loans are usually best for borrowers who expect to move in three or five years. These types of ARMs benefit people who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and don't plan to remain in the home longer than this initial low-rate period. ARMs are risky if property values go down and borrowers can't sell or refinance their loan.