Fixed versus adjustable rate loans
A fixed-rate loan features the same payment for the entire duration of your mortgage. Your property taxes may go up (or rarely, down), and so might the homeowner's insurance in your monthly payment. For the most part payments on a fixed-rate mortgage will be very stable.
During the early amortization period of a fixed-rate loan, most of your payment pays interest, and a much smaller percentage toward principal. The amount applied to your principal amount goes up gradually each month.
You might choose a fixed-rate loan to lock in a low interest rate. Borrowers select fixed-rate loans because interest rates are low and they wish to lock in at this low rate. If you have an Adjustable Rate Mortgage (ARM) now, refinancing with a fixed-rate loan can offer greater monthly payment stability. If you currently have an Adjustable Rate Mortgage (ARM), we can help you lock in a fixed-rate at a favorable rate. Call 1st Credential Mortgage Inc at (281) 778-0805 for details.
Adjustable Rate Mortgages — ARMs, come in many varieties. ARMs usually adjust twice a year, based on various indexes.
Most programs have a cap that protects borrowers from sudden monthly payment increases. Some ARMs can't adjust more than 2% per year, regardless of the underlying interest rate. Sometimes an ARM has a "payment cap" which guarantees your payment can't increase beyond a fixed amount in a given year. Most ARMs also cap your interest rate over the life of the loan period.
ARMs usually start out at a very low rate that usually increases over time. You've probably read about 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These kinds of loans are fixed for a certain number of years (3 or 5), then adjust after the initial period. Loans like this are usually best for people who expect to move in three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the initial lock expires.
You might choose an Adjustable Rate Mortgage to get a lower introductory interest rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate goes up. ARMs can be risky when housing prices go down because homeowners can get stuck with increasing rates when they can't sell or refinance with a lower property value.
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!