Adjustable versus fixed rate loans
With a fixed-rate loan, your payment doesn't change for the entire duration of your mortgage. The portion of the payment allocated to principal (the loan amount) goes up, however, the amount you pay in interest will go down in the same amount. Your property taxes may go up (or rarely, down), and your insurance rates might vary as well. For the most part monthly payments on your fixed-rate mortgage will be very stable.
At the beginning of a a fixed-rate loan, the majority the payment goes toward interest. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan to lock in a low rate. Borrowers choose fixed-rate 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 offer greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we can assist you in locking a fixed-rate at a good rate. Call 1st Credential Mortgage Inc at (281) 778-0805 for details.
There are many kinds of Adjustable Rate Mortgages. ARMs usually adjust every six months, based on various indexes.
The majority of ARMs are capped, so they can't go up above a specified amount in a given period. Some ARMs can't adjust more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" which ensures that your payment will not go above a fixed amount in a given year. Plus, almost all adjustable programs have a "lifetime cap" — your rate won't exceed the cap percentage.
ARMs most often feature the lowest, most attractive rates at the start. They guarantee that interest rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. In these loans, the initial rate is fixed for three or five years. After this period it adjusts every year. These loans are fixed for 3 or 5 years, then adjust after the initial period. Loans like this are often best for borrowers who expect to move in three or five years. These types of ARMs benefit people who plan to move before the initial lock expires.
Most borrowers who choose ARMs choose them because they want to get lower introductory rates and do not plan to stay in the house longer than the introductory low-rate period. ARMs can be risky in a down market because homeowners can get stuck with rates that go up if they cannot sell their home or refinance with a lower property value.
Have questions about mortgage loans? Call us at (281) 778-0805. We answer questions about different types of loans every day.