Fixed versus adjustable rate loans
A fixed-rate loan features the same payment 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 payments for your fixed-rate loan will increase very little.
At the beginning of a a fixed-rate mortgage loan, most of the 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 rate. People select fixed-rate loans when interest rates are low and they want to lock in at this low rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide greater stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad 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 types of Adjustable Rate Mortgages. Generally, the interest rates for ARMs are based on an outside index. Some examples of outside indexes are: the 6-month Certificate of Deposit (CD) rate, the 1 year Treasury Security rate, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.
Most Adjustable Rate Mortgages feature this cap, which means they won't increase over a certain amount in a given period. Some ARMs can't increase more than two percent per year, regardless of the underlying interest rate. Sometimes an ARM features a "payment cap" that guarantees your payment will not go above a certain amount over the course of a given year. Most ARMs also cap your interest rate over the duration of the loan.
ARMs most often have their lowest, most attractive rates at the start. They provide the lower rate from a month to ten years. You may hear people talking about "3/1 ARMs" or "5/1 ARMs". In these loans, the introductory rate is set for three or five years. It then adjusts every year. These loans are fixed for a certain number of years (3 or 5), then they adjust. These loans are often best for people who anticipate moving within three or five years. These types of ARMs benefit borrowers who will sell their house or refinance before the loan adjusts.
You might choose an Adjustable Rate Mortgage to get a very low introductory rate and count on moving, refinancing or absorbing the higher rate after the initial rate expires. ARMs can be risky if property values decrease and borrowers cannot sell their home or refinance their loan.
Have questions about mortgage loans? Call us at (281) 778-0805. We answer questions about different types of loans every day.