Differences between fixed and adjustable loans

A fixed-rate loan features the same payment amount over the life of your mortgage. The property tax and homeowners insurance will go up over time, but generally, payments on these types of loans vary little.

Early in a fixed-rate loan, most of your payment goes toward interest, and a significantly smaller percentage toward principal. That reverses as the loan ages.

You can choose a fixed-rate loan to lock in a low rate. People choose these types of loans when interest rates are low and they wish to lock in the low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you currently have an Adjustable Rate Mortgage (ARM), 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 to learn more.

Adjustable Rate Mortgages — ARMs, come in a great number of varieties. ARMs usually adjust every six months, based on various indexes.

Most programs feature a "cap" that protects borrowers from sudden monthly payment increases. There may be a cap on how much your interest rate can increase in one period. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Sometimes an ARM features a "payment cap" which guarantees that your payment won't increase beyond a certain amount over the course of a given year. Almost all ARMs also cap your interest rate over the duration of the loan.

ARMs most often have the lowest rates toward the start of the loan. They provide that rate from a month to ten years. You've probably read about 5/1 or 3/1 ARMs. For these loans, the introductory 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 best for borrowers who anticipate moving within three or five years. These types of adjustable rate loans most benefit people who will move before the initial lock expires.

You might choose an Adjustable Rate Mortgage to get a very low initial interest rate and count on moving, refinancing or absorbing the higher rate after the introductory rate expires. 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.

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