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What is a Savings and Loan Association
A savings and loan association (similar to a bank) is a
financial institution which specializes
in accepting savings deposits and making
mortgage loans. Depositors earn interest
on their deposits, often at a higher
rate than is offered at commercial banks.
The S&L invests some of these deposits
in residential mortgage loans, enabling
more people to purchase and/or repair
their homes. Savings and loan associations
are active participants in the home
loan mortgage market.
Statistics indicate that half the mortgage
loans are made by local savings and
loans. Check their rates when shopping
for a home mortgage loan, they are usually
very good.
Thrift institution is a general term
for savings banks and savings and loan
associations.
Fixed-Rate
Mortgage vs Adjustable Rate Mortgage
Fixed-Rate
Mortgage
A Fixed-Rate Mortgage applies
the same interest rate toward monthly
loan payments for the life of the loan.
Fixed-rate mortgages are more straightforward
and easier to understand than Adjustable
Rate Mortgages (ARMs), are more secure
for the buyer, and are popular with
first-time home buyers. Since the risk
to the lender is higher, fixed-rate
mortgages generally have higher interest
rates than ARMs.
For example, a lender can offer a 30-year
fixed loan to a home buyer at a 7.0%
interest rate. The loan is locked in
to the 7.0% interest rate, even if the
market interest rate rises to 9.0%.
Conversely, if the market interest rate
decreases to 5.5%, the borrower will
continue to pay the 7% interest rate.
Fixed-Rate benefits include:
- No change in monthly principal and
interest payments regardless of fluctuations
in interest rates
- More stability may give you "peace-of-mind"
Fixed-Rate considerations include:
- Higher initial monthly payments
compared to those of adjustable rate
mortgages
- Less flexibility
Adjustable
Rate Mortgage
An Adjustable Rate Mortgage
(ARM) does not apply the same interest
rate toward monthly payments for the
life of the loan. Throughout the life
of that loan, the home buyer's principal
and interest payment will adjust periodically
based on fluctuations in the interest
rate.
For example, an S&L or
bank mortgage loan dept could offer a
30-year ARM loan to a home buyer at
say an initial 6.5% interest rate. During
an adjustment period for the ARM loan,
the market interest rate could rise
to 8.0%, resulting in a significantly
larger interest payment. Similarly,
the market interest rate could decrease
to 6.0%, resulting in lower
home loan interest
payments.
ARM benefits include:
- Initial mortgage loan payments lower due to lower
beginning interest rate, historically about
1 to 2 percentage points below the fixed
rate
- Ability to qualify for a higher
loan amount due to lower initial interest
rates
- Lower interest payments if the interest
rate drops over time
- Interest rate caps limit the maximum
interest payment allowed for the loan
ARM considerations include:
- Initial lower interest rate and
monthly payments are temporary and
apply to the first adjustment period.
Typically, the interest rate will
rise after the initial adjustment
period.
- Higher interest payments if the
interest rate rises over time
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