Differences between adjustable and fixed loans

A fixed-rate loan features a fixed payment amount for the entire duration of your loan. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments for your fixed-rate mortgage will be very stable.

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 gradually every month.

You can choose a fixed-rate loan to lock in a low interest rate. People choose these types of loans when interest rates are low and they want to lock in at the lower rate. For homeowners who have an ARM now, refinancing with a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at the best rate currently available. Call 1st Credential Mortgage Inc at (281) 778-0805 for details.

There are many types of Adjustable Rate Mortgages. ARMs are generally adjusted every six months, based on various indexes.

Most programs feature a cap that protects you from sudden increases in monthly payments. Some ARMs won't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which guarantees your payment can't go above a fixed amount in a given year. Additionally, the great majority of ARMs feature a "lifetime cap" — your interest rate can't go over the cap amount.

ARMs most often feature their lowest, most attractive rates at the beginning of the loan. They usually provide the lower rate from a month to ten years. You've likely heard of 5/1 or 3/1 ARMs. For these loans, the introductory rate is set for three or five years. After this period it adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are often best for borrowers who anticipate moving in three or five years. These types of ARMs most benefit borrowers who will move before the initial lock expires.

Most people who choose ARMs do so because they want to take advantage of lower introductory rates and don't plan on remaining in the house for any longer than this initial low-rate period. ARMs are risky if property values decrease and borrowers can't sell their home or refinance.

Have questions about mortgage loans? Call us at (281) 778-0805. We answer questions about different types of loans every day.

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