Differences between fixed and adjustable loans
With a fixed-rate loan, your monthly payment doesn't change for the life of the mortgage. The amount of the payment that goes to your principal (the loan amount) increases, but your interest payment will decrease in the same amount. 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 mortgage will be very stable.
At the beginning of a a fixed-rate loan, the majority the payment is applied to interest. This proportion gradually reverses as the loan ages.
You can choose a fixed-rate loan in order to lock in a low interest rate. People select these types of loans when interest rates are low and they wish to lock in at this low rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at the best rate currently available. Call Homewithloan.com at 972.798.2110 to discuss how we can help.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
Most Adjustable Rate Mortgages are capped, which means they won't increase above a specific amount in a given period of time. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in a given period. Plus, almost all ARM programs have a "lifetime cap" — the interest rate can't exceed the capped percentage.
ARMs most often feature the lowest, most attractive rates at the start. They usually provide that rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 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 often best for people who expect to move in three or five years. These types of ARMs are best for borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to take advantage of a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs can be risky when housing prices go down because homeowners could be stuck with increasing rates when they cannot sell or refinance with a lower property value.
Have questions about mortgage loans? Call us at 972.798.2110. It's our job to answer these questions and many others, so we're happy to help!