Fixed versus adjustable rate loans
With a fixed-rate loan, your payment remains the same for the life of the mortgage. The portion of the payment that goes to principal (the amount you borrowed) increases, but your interest payment will go down accordingly. The property tax and homeowners insurance will increase over time, but for the most part, payments on these types of loans vary little.
When you first take out a fixed-rate mortgage loan, the majority your payment is applied to interest. The amount paid toward principal goes up slowly every month.
You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans when interest rates are low and they wish to lock in the lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into 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 a favorable rate. Call 1st Credential Mortgage Inc at (281) 778-0805 to discuss how we can help.
There are many different types of Adjustable Rate Mortgages. Generally, interest 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.
The majority of Adjustable Rate Mortgages are capped, which means they won't increase over a specific amount in a given period of time. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees that your payment won't increase beyond a certain amount over the course of a given year. Additionally, almost all ARM programs have a "lifetime cap" — the rate won't go over the cap amount.
ARMs usually start out 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". For these loans, the introductory rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are usually best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs most benefit borrowers who plan to sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to take advantage of a lower initial interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when property values go down and borrowers are unable to sell or refinance their loan.
Have questions about mortgage loans? Call us at (281) 778-0805. It's our job to answer these questions and many others, so we're happy to help!