Adjustable versus fixed loans
With a fixed-rate loan, your monthly payment never changes for the entire duration of your loan. The longer you pay, the more of your payment goes toward principal. The property taxes and homeowners insurance will go up over time, but generally, payment amounts on fixed rate loans change little over the life of the loan.
When you first take out a fixed-rate mortgage loan, most of your payment is applied to interest. As you pay , more of your payment goes toward principal.
You can choose a fixed-rate loan in order to lock in a low interest rate. Borrowers choose fixed-rate loans when interest rates are low and they want to lock in the low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater consistency in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'd love to help you lock in a fixed-rate at a good rate. Call 1st Credential Mortgage Inc at (281) 778-0805 to discuss your situation with one of our professionals.
There are many different types of Adjustable Rate Mortgages. Generally, interest on ARMs are based on an outside index. Some examples of outside indexes are: the 6-month CD rate, the one-year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most programs have a cap that protects you from sudden increases in monthly payments. 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 can't go above a fixed amount in a given year. Almost all ARMs also cap your rate over the life of the loan period.
ARMs usually start out at a very low rate that usually increases as the loan ages. You may have heard about "3/1 ARMs" or "5/1 ARMs". In these loans, the initial rate is set for three or five years. It then adjusts every year. These types of loans are fixed for 3 or 5 years, then they adjust. Loans like this are best for borrowers who anticipate moving within three or five years. These types of adjustable rate programs benefit people who plan to move before the initial lock expires.
Most borrowers who choose ARMs do so when they want to take advantage of lower introductory rates and do not plan on remaining in the house for any longer than the introductory low-rate period. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they cannot sell 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.