Differences between fixed and adjustable rate loans

A fixed-rate loan features the same payment amount for the entire duration of the mortgage. The property taxes and homeowners insurance which are almost always part of the payment will go up over time, but generally, payment amounts on these types of loans change little over the life of the loan.

Your first few years of payments on a fixed-rate loan go primarily toward interest. The amount paid toward principal increases up gradually every month.

You can choose a fixed-rate loan to lock in a low interest rate. Borrowers choose these types of loans because interest rates are low and they want to lock in at this lower rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can provide more monthly payment stability. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to help you lock in a fixed-rate at a favorable rate. Call 1st Credential Mortgage Inc at (281) 778-0805 for details.

There are many different kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.

Most ARM programs feature a "cap" that protects you from sudden increases in monthly payments. There may be a cap on how much your interest rate can go up in one period. For example: no more than a couple percent a 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 directly, caps the amount the payment can go up in a given period. Almost all ARMs also cap your interest rate over the duration of the loan.

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". In these loans, the introductory rate is fixed 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. These loans are best for people who expect to move in three or five years. These types of adjustable rate loans are best for people who plan to sell their house or refinance before the loan adjusts.

Most borrowers who choose ARMs do so when they want to get lower introductory rates and do not plan to stay in the house for any longer than the introductory low-rate period. ARMs are risky if property values go down and borrowers cannot sell their home or refinance.

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!

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