Adjustable versus fixed loans
A fixed-rate loan features a fixed payment amount for the entire duration of the loan. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part monthly payments on a fixed-rate loan will increase very little.
During the early amortization period of a fixed-rate loan, a large percentage of your payment pays interest, and a much smaller part goes to principal. 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 choose these types of loans when interest rates are low and they wish to lock in this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can offer more consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to assist you in locking a fixed-rate at a favorable rate. Call Homewithloan.com at 972.798.2110 to discuss how we can help.
Adjustable Rate Mortgages — ARMs, as we called them above — come in a great number of varieties. ARMs usually adjust twice a year, based on various indexes.
Most Adjustable Rate Mortgages are capped, so they can't go up over a specified amount in a given period. Your ARM may feature a cap on how much your interest rate can increase in one period. For example: no more than two percent per year, even though the underlying index increases by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest rate directly, caps the amount that the monthly payment can go up in a given period. Almost all ARMs also cap your rate over the duration of the loan period.
ARMs usually start at a very low rate that may increase as the loan ages. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. After this period it adjusts every year. These loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are best for people who anticipate moving within three or five years. These types of ARMs most benefit borrowers who will sell their house or refinance before the initial lock expires.
Most people who choose ARMs choose them because they want to get lower introductory rates and do not plan on remaining in the house for any longer than this initial low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 972.798.2110. We answer questions about different types of loans every day.