Adjustable versus fixed rate loans

A fixed-rate loan features a fixed payment over the life of the mortgage. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. But generally monthly payments for your fixed-rate mortgage will be very stable.

During the early amortization period of a fixed-rate loan, most of your monthly payment goes toward interest, and a much smaller part goes to principal. As you pay on the loan, more of your payment is applied to principal.

You can choose a fixed-rate loan to lock in a low interest rate. People choose fixed-rate loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can offer greater consistency in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), we'll be glad to assist you in locking a fixed-rate at the best rate currently available. Call Homewithloan.com at 972.798.2110 to learn more.

There are many kinds of Adjustable Rate Mortgages. Generally, the interest rates for 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 programs have a cap that protects you from sudden increases in monthly payments. Some ARMs won't increase more than two percent per year, regardless of the underlying interest rate. Your loan may have a "payment cap" that instead of capping the interest rate directly, caps the amount that your payment can increase in one period. Additionally, almost all ARMs have a "lifetime cap" — your interest rate can't go over the cap amount.

ARMs usually start at a very low rate that may increase over time. You've probably heard of 5/1 or 3/1 ARMs. In these loans, the initial rate is set for three or five years. It then adjusts every year. These kinds of loans are fixed for 3 or 5 years, then adjust after the initial period. These loans are usually best for borrowers who expect to move within three or five years. These types of adjustable rate programs are best for borrowers who plan to sell their house or refinance before the loan adjusts.

You might choose an ARM to get a lower introductory rate and count on moving, refinancing or simply absorbing the higher rate after the initial rate expires. ARMs can be risky when property values decrease and borrowers cannot sell their home or refinance.

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!

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